UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One) |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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(Address of Principal Executive Offices) |
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(Zip Code) |
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Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of January 29, 2024, the registrant had
TABLE OF CONTENTS
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Condensed consolidated statements of operations and comprehensive income |
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Management’s discussion and analysis of financial condition and results of operations |
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PART I. FINANCIAL INFORMATION
Item 1. Financial statements
SONOS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except par values)
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As of |
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December 30, |
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September 30, |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net |
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Inventories |
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Prepaids and other current assets |
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Total current assets |
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Property and equipment, net |
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Operating lease right-of-use assets |
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Goodwill |
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Intangible assets, net |
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In-process research and development |
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Other intangible assets |
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Deferred tax assets |
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Other noncurrent assets |
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Total assets |
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$ |
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$ |
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Liabilities and stockholders’ equity |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued expenses |
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Accrued compensation |
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Deferred revenue, current |
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Other current liabilities |
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Total current liabilities |
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Operating lease liabilities, noncurrent |
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Deferred revenue, noncurrent |
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Deferred tax liabilities |
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Other noncurrent liabilities |
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Total liabilities |
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Commitments and contingencies () |
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Stockholders’ equity: |
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Common stock, $ |
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Treasury stock |
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Additional paid-in capital |
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Retained earnings (accumulated deficit) |
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Accumulated other comprehensive loss |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
SONOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(unaudited, in thousands, except share and per share amounts)
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Three Months Ended |
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December 30, |
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December 31, |
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Revenue |
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$ |
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$ |
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Cost of revenue |
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Gross profit |
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Operating expenses |
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Research and development |
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Sales and marketing |
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General and administrative |
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Total operating expenses |
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Operating income |
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Other income, net |
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Interest income |
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Interest expense |
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Other income, net |
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Total other income, net |
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Income before provision for income taxes |
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Provision for income taxes |
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Net income |
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$ |
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$ |
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Net income attributable to common stockholders: |
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Basic and diluted |
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$ |
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$ |
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Net income per share attributable to common stockholders: |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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Weighted-average shares used in computing net income per share attributable to common stockholders: |
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Basic |
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Diluted |
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Total comprehensive income |
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Net income |
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Change in foreign currency translation adjustment |
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( |
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Comprehensive income |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
SONOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited, in thousands, except share amounts)
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Three Months Ended |
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December 30, |
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December 31, |
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Total stockholders' equity, beginning balances |
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$ |
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$ |
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Common stock |
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Beginning balances |
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$ |
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$ |
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Issuance of common stock pursuant to equity incentive plans |
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Retirement of treasury stock |
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( |
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Ending balances |
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$ |
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$ |
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Additional paid-in capital |
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Beginning balances |
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$ |
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$ |
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Issuance of common stock pursuant to equity incentive plans |
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Retirement of treasury stock |
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( |
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( |
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Stock-based compensation expense |
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Ending balances |
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$ |
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$ |
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Treasury stock |
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Beginning balances |
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$ |
( |
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$ |
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Retirement of treasury stock |
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Repurchase of common stock |
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( |
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( |
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Repurchase of common stock related to shares withheld for tax in connection with vesting of stock awards |
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( |
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( |
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Ending balances |
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$ |
( |
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$ |
( |
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Retained earnings (accumulated deficit) |
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Beginning balances |
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$ |
( |
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$ |
( |
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Net income |
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Ending balances |
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$ |
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$ |
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Accumulated other comprehensive loss |
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Beginning balances |
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$ |
( |
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$ |
( |
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Change in foreign currency translation adjustment |
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( |
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( |
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Ending balances |
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$ |
( |
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$ |
( |
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Total stockholders' equity, ending balances |
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$ |
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$ |
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Common stock shares: |
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Beginning balances |
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Issuance of common stock pursuant to equity incentive plans |
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Retirement of treasury stock |
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( |
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( |
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Ending balances |
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Treasury stock shares: |
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Beginning balances |
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( |
) |
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( |
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Retirement of treasury stock |
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Repurchase of common stock |
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( |
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( |
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Repurchase of common stock related to shares withheld for tax in connection with vesting of stock awards |
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( |
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( |
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Ending balances |
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( |
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( |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
SONOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
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Three Months Ended |
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December 30, |
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December 31, |
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Cash flows from operating activities |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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Restructuring and abandonment charges |
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— |
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Stock-based compensation expense |
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Provision for inventory obsolescence |
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Other |
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Deferred income taxes |
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( |
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Foreign currency transaction gains |
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( |
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( |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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( |
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( |
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Inventories |
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Other assets |
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( |
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Accounts payable and accrued expenses |
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( |
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( |
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Accrued compensation |
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Deferred revenue |
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( |
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Other liabilities |
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Net cash provided by operating activities |
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Cash flows from investing activities |
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Purchases of property and equipment |
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( |
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( |
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Net cash used in investing activities |
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( |
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( |
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Cash flows from financing activities |
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Payments for repurchase of common stock |
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( |
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( |
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Proceeds from exercise of common stock options |
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Payments for repurchase of common stock related to shares withheld for tax in connection with vesting of stock awards |
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( |
) |
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( |
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Net cash used in financing activities |
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( |
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( |
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Effect of exchange rate changes on cash and cash equivalents |
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Net increase in cash and cash equivalents |
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Cash and cash equivalents |
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Beginning of period |
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End of period |
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$ |
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$ |
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Supplemental disclosure |
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Cash paid for interest |
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$ |
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$ |
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Cash paid for taxes, net of refunds |
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$ |
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$ |
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Cash paid for amounts included in the measurement of lease liabilities |
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$ |
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$ |
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Supplemental disclosure of non-cash investing and financing activities |
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Purchases of property and equipment in accounts payable and accrued expenses |
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$ |
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$ |
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Right-of-use assets obtained in exchange for new operating lease liabilities |
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$ |
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$ |
— |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
6
SONOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Business Overview and Basis of Presentation
Description of business
Sonos, Inc. and its wholly owned subsidiaries (collectively, "Sonos," the "Company," "we," "us" or "our") designs, develops, manufactures, and sells audio products and services. The Sonos sound system provides customers with an immersive listening experience created by the design of its speakers and components, a proprietary software platform, and the ability to stream content from a variety of sources over the customer’s wireless network or over Bluetooth.
The Company’s products are sold through third-party physical retailers, including custom installers of home audio systems, select e-commerce retailers, and its website, sonos.com. The Company’s products are distributed in over
Basis of presentation and preparation
The accompanying condensed consolidated financial statements are unaudited. The condensed consolidated balance sheet as of September 30, 2023, has been derived from the audited consolidated financial statements of the Company.
The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all the information and footnotes required by U.S. GAAP for annual financial statements. They should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2023, (the "Annual Report"), filed with the SEC on November 20, 2023.
In management’s opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of the Company’s financial position, its results of operations, and its cash flows for the interim periods presented. The results of operations for the three months ended December 30, 2023, are not necessarily indicative of the results to be expected for the full fiscal year or any other period.
The Company operates on a 52- week or 53- week fiscal year ending on the Saturday nearest September 30 each year. The Company’s fiscal year is divided into four quarters of 13 weeks, each beginning on a Sunday and containing two 4-week periods followed by a 5-week period. An additional week is included in the fourth fiscal quarter approximately every five years to realign fiscal quarters with calendar quarters. This last occurred in the fourth quarter of the Company’s fiscal year ended October 3, 2020, and will reoccur in the fiscal year ending October 3, 2026. The three months ended December 30, 2023, and December 31, 2022, spanned 13 weeks each. As used in this Quarterly Report on Form 10-Q, "fiscal 2024" refers to the fiscal year ending September 28, 2024, "fiscal 2023" refers to the fiscal year ended September 30, 2023, "fiscal 2022" refers to the fiscal year ended October 1, 2022, "fiscal 2021" refers to the fiscal year ended October 2, 2021, and "fiscal 2020" refers to the fiscal year ended October 3, 2020.
Use of estimates and judgments
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the amounts reported and disclosed in the condensed consolidated financial statements
7
SONOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
and accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, the Company evaluates its estimates and judgments compared to historical experience and expected trends.
2. Summary of Significant Accounting Policies
There have been no changes in the Company’s significant accounting policies, recently adopted accounting pronouncements or recent accounting pronouncements pending adoption from those disclosed in the Annual Report, except as noted below.
Recent accounting pronouncements pending adoption
In November 2023, the Financial Accounting Standards Board ("FASB") issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This standard expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment’s profit or loss and assets. All disclosure requirements under ASU 2023-07 are also required for public entities with a single reportable segment. The amendments are effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The amendments should be applied retrospectively to all prior periods presented in the financial statements. The Company is currently evaluating the pronouncement to determine the impact it may have on the Company's condensed consolidated financial statements and related disclosures.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This update includes amendments that further enhance income tax disclosures, primarily through standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction. The amendments are effective for fiscal years beginning after December 15, 2024, with early adoption permitted, and may be applied either prospectively or retrospectively. The Company is currently evaluating the pronouncement to determine the impact it may have on the Company's condensed consolidated financial statements and related disclosures.
3. Fair Value Measurements
The carrying values of the Company’s financial instruments, including accounts receivable and accounts payable, approximate their fair values due to the short period of time to maturity or repayment.
The following table summarizes fair value measurements by level for the assets measured at fair value on a recurring basis as of December 30, 2023, and September 30, 2023:
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December 30, 2023 |
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Level 1 |
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Level 2 |
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Level 3 |
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Total |
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(In thousands) |
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Assets: |
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Money market funds (cash equivalents) |
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$ |
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$ |
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$ |
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$ |
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September 30, 2023 |
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Level 1 |
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Level 2 |
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Level 3 |
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Total |
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(In thousands) |
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Assets: |
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Money market funds (cash equivalents) |
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$ |
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$ |
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$ |
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$ |
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8
SONOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
4. Revenue and Geographic Information
Disaggregation of revenue
Revenue is attributed to each region based on ship-to address, and also includes the applicable service revenue for software upgrades and cloud-based services attributable to each region. Revenue by region is as follows:
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Three Months Ended |
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December 30, |
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December 31, |
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(In thousands) |
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Americas |
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$ |
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$ |
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Europe, Middle East and Africa ("EMEA") |
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Asia Pacific ("APAC") |
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Total revenue |
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$ |
|
|
$ |
|
||
Revenue is attributed to individual countries based on ship-to address and also includes the applicable service revenue for software upgrades and cloud-based services attributable to each country. Revenue by significant countries is as follows:
|
|
Three Months Ended |
|
|||||
|
|
December 30, |
|
|
December 31, |
|
||
(In thousands) |
|
|
|
|
|
|
||
United States |
|
$ |
|
|
$ |
|
||
Other countries |
|
|
|
|
|
|
||
Total revenue |
|
$ |
|
|
$ |
|
||
Revenue by product category also includes the applicable service revenue for software upgrades and cloud-based services attributable to each product category. Revenue by major product category is as follows:
|
|
Three Months Ended |
|
|||||
|
|
December 30, |
|
|
December 31, |
|
||
(In thousands) |
|
|
|
|
|
|
||
Sonos speakers |
|
$ |
|
|
$ |
|
||
Sonos system products |
|
|
|
|
|
|
||
Partner products and other revenue |
|
|
|
|
|
|
||
Total revenue |
|
$ |
|
|
$ |
|
||
5. Balance Sheet Components
Accounts receivable, net
Accounts receivable, net consist of the following:
|
|
December 30, |
|
|
September 30, |
|
||
(In thousands) |
|
|
|
|
|
|
||
Accounts receivable |
|
$ |
|
|
$ |
|
||
Allowance for credit losses |
|
|
( |
) |
|
|
( |
) |
Allowance for sales incentives |
|
|
( |
) |
|
|
( |
) |
Accounts receivable, net of allowances |
|
$ |
|
|
$ |
|
||
9
SONOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
Inventories
Inventories consist of the following:
|
|
December 30, |
|
|
September 30, |
|
||
(In thousands) |
|
|
|
|
|
|
||
Finished goods |
|
$ |
|
|
$ |
|
||
Component parts |
|
|
|
|
|
|
||
Inventories |
|
$ |
|
|
$ |
|
||
As of December 30, 2023, and September 30, 2023, inventory write-downs were $
Goodwill
The following table presents the changes in carrying amount of goodwill during the three months ended December 30, 2023:
(In thousands) |
|
|
|
|
Balance as of September 30, 2023 |
|
$ |
|
|
Effect of exchange rate changes on goodwill |
|
|
|
|
Balance as of December 30, 2023 |
|
$ |
|
|
Intangible assets
The following table reflects the changes in the net carrying amount of the components of intangible assets associated with the Company's acquisition activity:
|
|
December 30, 2023 |
|
|||||||||||||||||
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Foreign Currency Translation |
|
|
Net Carrying Value |
|
|
Weighted-Average Remaining Life |
|
|||||
(In thousands, except weighted-average remaining life) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Trade name |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
|
|
||||
Technology-based |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
||||
Total finite-lived intangible assets |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
||||
In-process research and development not subject to amortization |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
||||
Total intangible assets |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
|
|
||||
10
SONOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
The following table summarizes the estimated future amortization expense of the Company's intangible assets as of December 30, 2023:
Fiscal years ending |
|
Future Amortization Expense |
|
|
(In thousands) |
|
|
|
|
Remainder of fiscal 2024 |
|
$ |
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
2029 and thereafter |
|
|
|
|
Total future amortization expense |
|
$ |
|
|
Cloud Computing Arrangements
Capitalized costs to implement cloud computing arrangements net of accumulated amortization are reported as a component of other noncurrent assets on the Company's condensed consolidated balance sheets were as follows:
|
|
December 30, |
|
|
September 30, |
|
||
Cloud computing implementation costs |
|
$ |
|
|
$ |
|
||
Less: accumulated amortization |
|
|
|
|
|
|
||
Cloud computing implementation costs, net |
|
$ |
|
|
$ |
|
||
Amortization expenses for implementation costs for cloud-based computing arrangements for the three months ended December 30, 2023, and December 31, 2022 were $
Accrued expenses
Accrued expenses consisted of the following:
|
|
December 30, |
|
|
September 30, |
|
||
(In thousands) |
|
|
|
|
|
|
||
Accrued inventory and supply chain costs |
|
$ |
|
|
$ |
|
||
Accrued taxes |
|
|
|
|
|
|
||
Accrued advertising and marketing |
|
|
|
|
|
|
||
Accrued general and administrative expenses |
|
|
|
|
|
|
||
Other accrued payables |
|
|
|
|
|
|
||
Accrued product development |
|
|
|
|
|
|
||
Total accrued expenses |
|
$ |
|
|
$ |
|
||
Deferred revenue
Amounts invoiced in advance of revenue recognition are recorded as deferred revenue on the condensed consolidated balance sheets. Deferred revenue primarily relates to revenue allocated to unspecified software upgrades and cloud-based services. Recognition of revenue for the three-month period ended December 31, 2022, includes $
11
SONOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
The following table presents the changes in the Company’s deferred revenue:
|
|
Three Months Ended |
|
|||||
|
|
December 30, |
|
|
December 31, |
|
||
(In thousands) |
|
|
|
|
|
|
||
Deferred revenue, beginning of period |
|
$ |
|
|
$ |
|
||
Recognition of revenue included in beginning of period deferred revenue |
|
|
( |
) |
|
|
( |
) |
Revenue deferred, net of revenue recognized on contracts in the respective period |
|
|
|
|
|
|
||
Deferred revenue, end of period |
|
$ |
|
|
$ |
|
||
The Company expects the following recognition of deferred revenue as of December 30, 2023:
|
|
For the fiscal years ending |
|
|
|
|
||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|||||||||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Deferred revenue expected to be recognized |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Other current liabilities
Other current liabilities consist of the following:
|
|
December 30, |
|
|
September 30, |
|
||
(In thousands) |
|
|
|
|
|
|
||
Reserve for returns |
|
$ |
|
|
$ |
|
||
Other |
|
|
|
|
|
|
||
Warranty liability |
|
|
|
|
|
|
||
|
|
|
|
|
|
|||
Total other current liabilities |
|
$ |
|
|
$ |
|
||
The following table presents the changes in the Company’s warranty liability:
|
|
December 30, |
|
|
December 31, |
|
||
(In thousands) |
|
|
|
|
|
|
||
Warranty liability, beginning of period |
|
$ |
|
|
$ |
|
||
Provision for warranties issued during the period |
|
|
|
|
|
|
||
Settlements of warranty claims during the period |
|
|
( |
) |
|
|
( |
) |
Warranty liability, end of period |
|
$ |
|
|
$ |
|
||
Leases
On July 13, 2023, as part of the Company's ongoing evaluation of its real estate needs and overall lease consolidation initiatives, the Company entered into a lease agreement for a new headquarters location for approximately
12
SONOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
6. Debt
On October 13, 2021, the Company entered into a Revolving Credit Agreement with JPMorgan Chase Bank, N.A., as the administrative agent, and the lenders party thereto (the "Revolving Credit Agreement").
The Revolving Credit Agreement provides for (i) a
The Company’s obligations under the Revolving Credit Agreement are secured by substantially all of the Company’s assets. The Revolving Credit Agreement contains customary representations and warranties, customary affirmative and negative covenants, a financial covenant that is tested quarterly and requires the Company to maintain a certain consolidated leverage ratio, and customary events of default. As of December 30, 2023, the Company was in compliance with all financial covenants under the Revolving Credit Agreement.
7. Commitments and Contingencies
Commitments to suppliers
As of December 30, 2023, the Company's open purchase orders to contract manufacturers for finished goods were approximately $
Legal proceedings
From time to time, the Company is involved in legal proceedings in the ordinary course of business, including claims relating to employee relations, business practices, and patent infringement. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict, and the Company’s view of these matters may change in the future as the litigation and events related thereto unfold. The Company expenses legal fees as incurred. The Company records a provision for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. An unfavorable outcome to any legal matter, if material, could have an adverse effect on the Company’s operations or its financial position, liquidity or results of operations.
The Company’s Lawsuits Against Google:
On January 7, 2020, the Company filed a complaint with the U.S. International Trade Commission ("ITC") against Alphabet Inc. ("Alphabet") and Google LLC ("Google") and a counterpart lawsuit in the U.S. District Court for the Central District of California against Google. The complaint and lawsuit each allege infringement by
13
SONOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
Alphabet and Google of certain Sonos patents related to its smart speakers and related technology. The counterpart lawsuit is stayed pending completion of the ITC investigation and appeal thereof. The ITC concluded its investigation in January 2022, finding all five of the Company’s asserted patents to be valid and infringed by Google, and further finding that one redesign per patent proposed by Google would avoid infringement. The ITC issued a limited exclusion order and a cease-and-desist order with respect to Google’s infringing products. The outcome of the ITC investigation is currently being appealed by the Company and Google.
On September 29, 2020, the Company filed another lawsuit against Google alleging infringement of additional Sonos patents and seeking monetary damages and other non-monetary relief. A jury trial was held in May 2023, which found one Sonos patent to be infringed and another Sonos patent not infringed, and returned an award of $
On December 1, 2020, the Company filed a lawsuit against two Google foreign subsidiaries in the regional court of Hamburg, Germany, alleging infringement of a Sonos patent seeking non-monetary relief. The Company has since withdrawn this action after having received some preliminary relief.
Google’s Lawsuits Against the Company:
On June 11, 2020, Google filed a lawsuit in the U.S. District Court for the Northern District of California against the Company alleging infringement by the Company of five Google patents and seeking monetary damages and other non-monetary relief. Four of these patents have since been found invalid by the Court or by the U.S. Patent and Trademark Office, or have been withdrawn from the case by Google. In this lawsuit, one patent remains asserted against the Company. No trial date is set.
On June 12, 2020, Google filed lawsuits in District Court Munich I against Sonos Europe B.V. and Sonos, Inc., alleging infringement of two Google patents seeking monetary damages and an injunction preventing sales of allegedly infringing products. In March 2021, the District Court Munich stayed the case for infringement of one Google patent pending the outcome of a nullity action concerning the validity of that patent. In June 2021, the Munich court issued a decision dismissing Google's complaint regarding the other Google patent for lack of infringement by the Company. Google has appealed the Munich court's ruling, which is pending.
On August 21, 2020, Google filed a lawsuit against the Company in Canada alleging infringement of one Google patent. On July 26, 2022, the Canadian court ruled that the Company does not infringe this patent after a trial on the merits. Google has appealed the Canadian court’s ruling, which is pending.
On August 21, 2020, Google filed a lawsuit against Sonos Europe B.V. and Sonos, Inc. in France, alleging infringement of two Google patents seeking monetary damages and an injunction preventing sales of allegedly infringing products. In February 2021, Google withdrew its infringement allegations regarding one patent in view of prior art brought to the attention of the court by the Company. In March 2022, the French trial court ruled for the Company on one of Google's asserted patents. The French trial court found the other Google patent invalid in November 2023. Google has appealed the French trial court's March 2022 and November 2023 rulings, which are both pending.
On August 21, 2020, Google filed a lawsuit against Sonos Europe B.V. and Sonos, Inc. in the Netherlands alleging infringement of a Google patent seeking an injunction preventing sales of allegedly infringing products. In October, 2022, the Netherlands court ruled that the Company does not infringe Google’s patent.
In September 2020, Google filed a lawsuit against Sonos Europe B.V. in the Netherlands, alleging infringement of a Google patent and seeking an injunction preventing sales of allegedly infringing products. In February 2022, the Court rejected Google's claims concerning this patent. Google has appealed this decision, which is pending.
14
SONOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
On August 8, 2022, Google filed two complaints with the ITC against the Company and two counterpart lawsuits in the Northern District of California against the Company, collectively alleging infringement by the Company of seven Google patents generally related to wireless charging, device setup, and voice control, and seeking monetary damages and other non-monetary relief. The counterpart lawsuits are stayed pending completion of the ITC investigations. The ITC has terminated the investigation as to one Google patent as a result of imminent expiration of that Google patent. An oral hearing in the first ITC investigation took place in June 2023. The first ITC investigation concluded in December 2023 with a final determination of no violation by the Company. No appeal has been filed as of the date of this filing. The oral hearing in the second ITC investigation has been postponed after the administrative law judge has indicated that she will be invalidating both Google patents at issue.
Implicit
On March 10, 2017, Implicit, LLC (“Implicit”) filed a patent infringement action in the United States District Court, District of Delaware against the Company. Implicit is asserting that the Company has infringed on certain claims of
The Company is involved in certain other litigation matters not listed above but does not consider these matters to be material either individually or in the aggregate at this time. The Company’s view of the matters not listed may change in the future as the litigation and events related thereto unfold.
Tariff refunds
On May 13, 2020, the Company was granted a temporary exclusion from the August 2019 Section 301 Tariff Action (List 4A) ("Section 301 tariffs"), eliminating the tariffs on the Company's component products imported from China until August 31, 2020. The exclusion for the Company’s component products was not extended past August 31, 2020, with the Section 301 tariffs for our component products automatically reinstated on September 1, 2020. On July 23, 2020, the Company was granted a temporary exclusion from Section 301 tariffs, eliminating the tariffs on the Company’s core speaker products imported from China until August 31, 2020. These exemptions entitled the Company to refunds for tariffs paid from September 2019 through December 2020. On August 28, 2020, the United States Trade Representative ("USTR") granted an extension through December 31, 2020, of the exclusion for the Company’s core speaker products, with the Section 301 tariffs for our core speaker products automatically reinstated on January 1, 2021. On March 23, 2022, the Company was granted an exclusion extension from the Section 301 tariffs, eliminating tariffs on the Company’s core speaker products, including certain new product introductions, imported from China from April 13, 2022, through December 31, 2022. This exemption entitled the Company to refunds for tariffs paid from October 12, 2021, through April 12, 2022. On December 16, 2022, the USTR granted an extension through September 30, 2023, of the exclusion for the Company's core speaker products. On September 6, 2023, the USTR extended the existing exclusions from September 30, 2023 to December 31, 2023, and on December 26, 2023, the USTR extended a further exclusion through May 31, 2024.
Tariff refund claims are subject to review and approval by the U.S. Customs and Border Protection. The Company recovered virtually all tariff refunds to which it was entitled by the end of fiscal 2023. As of December 30, 2023, the remaining refunds the Company expected to recover for tariffs paid from September 2019 through December 2020, and from October 12, 2021 through April 12, 2022, are minimal.
15
SONOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
8. Stockholders' Equity
On November 15, 2023, the Board of Directors (the "Board") authorized a common stock repurchase program of up to $
Treasury stock during the three months ended December 30, 2023 included
9. Stock-based Compensation
2018 Equity Incentive Plan
In July 2018, the Board adopted the 2018 Equity Incentive Plan (the "2018 Plan"). The 2018 Plan became effective in connection with the Company's initial public offering ("IPO"). The number of shares reserved for issuance under the 2018 Plan increases automatically on January 1 of each year beginning in 2019 and continuing through 2028 by a number of shares of common stock equal to the lesser of (x)
Stock options
Pursuant to the 2018 Plan, the Company issued stock options to employees and directors. The option price, number of shares, and grant date are determined at the discretion of the Board. For so long as the option holder performs services for the Company, the options generally vest over
The summary of the Company’s stock option activity is as follows:
|
|
Number of Options |
|
|
Weighted-Average Exercise Price |
|
|
Weighted-Average Remaining Contractual Term |
|
|
Aggregate Intrinsic Value |
|
||||
|
|
|
|
|
|
|
|
(In years) |
|
|
(In thousands) |
|
||||
Outstanding at September 30, 2023 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Exercised |
|
|
( |
) |
|
$ |
|
|
|
|
|
|
|
|||
Forfeited |
|
|
( |
) |
|
$ |
|
|
|
|
|
|
|
|||
Outstanding at December 30, 2023 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
As of December 30, 2023 and September 30, 2023, all outstanding stock options have vested and the Company had
16
SONOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
Restricted stock units ("RSU")
Pursuant to the 2018 Plan, the Company issues RSUs to employees and directors. RSUs vest quarterly over the service period, which is generally
|
|
Number of Units |
|
|
Weighted-Average Grant Date Fair Value |
|
|
Aggregate Intrinsic Value |
|
|||
|
|
|
|
|
|
|
|
(In thousands) |
|
|||
Outstanding at September 30, 2023 |
|
|
|
|
$ |
|
|
$ |
|
|||
Granted |
|
|
|
|
$ |
|
|
|
|
|||
Released |
|
|
( |
) |
|
$ |
|
|
|
|
||
Forfeited |
|
|
( |
) |
|
$ |
|
|
|
|
||
Outstanding at December 30, 2023 |
|
|
|
|
$ |
|
|
$ |
|
|||
At December 30, 2023 |
|
|
|
|
|
|
|
|
|
|||
Units expected to vest |
|
|
|
|
$ |
|
|
$ |
|
|||
As of December 30, 2023, and September 30, 2023, the Company had $
Performance stock units ("PSU")
Pursuant to the 2018 Plan, the Company has issued and may issue certain PSUs that vest on the satisfaction of service and performance conditions. The number of outstanding PSUs is based on the target number of share awards. The number of shares vested at the end of the performance period is based on achievement of performance conditions and may include adjustments to reflect the extent to which the corresponding performance goals have been achieved. The number of shares released during the three months ended December 30, 2023, includes performance achievement adjustments of a net reduction of
|
|
Number of Units |
|
|
Weighted-Average Grant Date Fair Value |
|
|
Aggregate Intrinsic Value |
|
|||
|
|
|
|
|
|
|
|
(In thousands) |
|
|||
Outstanding at September 30, 2023 |
|
|
|
|
$ |
|
|
$ |
|
|||
Granted |
|
|
|
|
$ |
|
|
|
|
|||
Released |
|
|
( |
) |
|
$ |
|
|
|
|
||
Forfeited |
|
|
— |
|
|
$ |
- |
|
|
|
|
|
Outstanding at December 30, 2023 |
|
|
|
|
$ |
|
|
$ |
|
|||
As of December 30, 2023, and September 30, 2023, the Company had $
17
SONOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
Stock-based compensation
Total stock-based compensation expense by functional category was as follows:
|
|
Three Months Ended |
|
|||||
|
|
December 30, |
|
|
December 31, |
|
||
(In thousands) |
|
|
|
|
|
|
||
Cost of revenue |
|
$ |
|
|
$ |
|
||
Research and development |
|
|
|
|
|
|
||
Sales and marketing |
|
|
|
|
|
|
||
General and administrative |
|
|
|
|
|
|
||
Total stock-based compensation expense |
|
$ |
|
|
$ |
|
||
10. Income Taxes
The Company’s tax provision and the resulting effective tax rate for interim periods is generally determined based upon its estimated annual effective tax rate ("AETR"), adjusted for the effect of discrete items arising in that quarter. The impact of such inclusions could result in a higher or lower effective tax rate during a quarter, based upon the mix and timing of actual earnings or losses versus annual projections. In each quarter, the Company updates its estimate of the AETR, and if the estimated AETR changes, a cumulative adjustment is made in that quarter.
The Company recorded a provision for income taxes of $
For the three months ended December 30, 2023, the Company calculated its U.S. income tax provision using the discrete method as though the interim year-to-date period was an annual period. The application of the AETR method generally required by ASC 740, Income Taxes (ASC 740), was impractical for the U.S. interim tax provision given that normal deviations in the projected pre-tax net income (loss) in the U.S. could have resulted in a disproportionate and unreliable effective tax rate under the AETR method. For the three months ended December 31, 2022, the Company recorded a provision for income taxes by applying an estimated AETR including the U.S. to year-to-date earnings in accordance with ASC 740. For the three months ended December 30, 2023, and the three months ended December 31, 2022, the Company's U.S. tax expense was adversely impacted by the requirement to capitalize and amortize research and development expenses under Section 174 of the U.S. Internal Revenue Code ("Section 174") as the Company recorded a current U.S. tax expense with no corresponding deferred tax benefit due to the valuation allowance maintained against its U.S. deferred tax assets.
For the three months ended December 30, 2023, the Company concluded that a full valuation allowance on its deferred tax assets in the U.S. continued to be appropriate considering cumulative pre-tax losses in recent years and uncertainty with respect to future taxable income. Release of the valuation allowance in the U.S. would result in a benefit to income tax expense for the period the release is recorded, which could have a material impact on net earnings. The timing and amount of the potential valuation allowance release are subject to significant management judgment, as well as prospective earnings in the U.S.
11. Net Income Per Share
Basic net income per share attributable to common stockholders is calculated by dividing net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding less shares subject to repurchase. Diluted net income per share attributable to common stockholders adjusts the basic net income per share attributable to common stockholders and the weighted-average number of shares of common stock outstanding for the potentially dilutive impact of stock awards, using the treasury stock method.
18
SONOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
The following table sets forth the computation of the Company’s basic and diluted net income per share attributable to common stockholders:
|
|
Three Months Ended |
|
|
|||||
|
|
December 30, |
|
|
December 31, |
|
|
||
(In thousands, except share and per share data) |
|
|
|
|
|
|
|
||
Numerator: |
|
|
|
|
|
|
|
||
Net income attributable to common stockholders - basic and diluted |
|
$ |
|
|
$ |
|
|
||
Denominator: |
|
|
|
|
|
|
|
||
Weighted-average shares of common stock—basic |
|
|
|
|
|
|
|
||
Effect of potentially dilutive stock options |
|
|
|
|
|
|
|
||
Effect of RSUs |
|
|
|
|
|
|
|
||
Effect of PSUs |
|
|
|
|
|
|
|
||
Weighted-average shares of common stock—diluted |
|
|
|
|
|
|
|
||
Net income per share attributable to common stockholders: |
|
|
|
|
|
|
|
||
Basic |
|
$ |
|
|
$ |
|
|
||
Diluted |
|
$ |
|
|
$ |
|
|
||
The following potentially dilutive shares were excluded from the computation of diluted net income per share attributable to common stockholders because including them would have been antidilutive:
|
|
Three Months Ended |
|
|||||
|
|
December 30, |
|
|
December 31, |
|
||
Stock options to purchase common stock |
|
|
|
|
|
|
||
Restricted stock units |
|
|
|
|
|
|
||
Performance stock units |
|
|
|
|
|
|
||
Total |
|
|
|
|
|
|
||
12. Retirement Plans
The Company has a defined contribution 401(k) plan (the "401(k) Plan") for the Company’s U.S.-based employees, as well as various defined contribution plans for its international employees. Eligible U.S. employees may make tax-deferred contributions under the 401(k) plan but are limited to the maximum annual dollar amount allowable under the Internal Revenue Code of 1986, as amended (the "Code"). The Company matches contributions towards the 401(k) Plan and international defined contribution plans. The Company's matching contributions totaled $
19
Item 2. Management's discussion and analysis of financial condition and results of operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report.
We operate on a 52- week or 53- week fiscal year ending on the Saturday nearest September 30 each year. Our fiscal year is divided into four quarters of 13 weeks, each beginning on a Sunday and containing two 4-week periods followed by a 5-week period. An additional week is included in the fourth fiscal quarter approximately every five years to realign fiscal quarters with calendar quarters.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding future operations, are forward-looking statements. In some cases, forward-looking statements may be identified by words such as "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "could," "would," "expect," "objective," "plan," "potential," "seek," "grow," "target," "if," and similar expressions intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations, objectives, restructuring efforts, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the section titled "Risk Factors" set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our other SEC filings, including our Annual Report. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results may differ materially and adversely from those anticipated or implied in the forward-looking statements. You should read this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect. Except as required by law, we do not undertake any obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise.
Overview
Sonos is one of the world's leading sound experience brands.
We pioneered multi-room, wireless audio products, debuting the world’s first multi-room wireless sound system in 2005. Today, our products include wireless, portable, and home theater speakers, components, and accessories to address consumers’ evolving audio needs. We are known for delivering unparalleled sound, thoughtful design aesthetic, simplicity of use, and an open platform. Our platform has attracted a broad range of more than 130 streaming content providers, such as Apple Music, Spotify, Deezer, and Pandora. These partners find value in our independent platform and access to our millions of desirable and engaged customers. We frequently introduce new services and features across our platform, providing our customers with enhanced functionality, improved sound, and an enriched user experience. We are committed to continuous technological innovation as reflected in our growing global patent portfolio. We believe our patents comprise the foundational intellectual property for wireless multi-room and other audio technologies.
We generate revenue from the sale of our Sonos speaker products, including wireless speakers and home theater speakers, from our Sonos system products, which largely comprises our component products, and from partner products and other revenue, including partnerships with IKEA and Sonance, Sonos and third-party accessories, licensing, advertising, and subscription revenue.
20
We have developed a robust product and software roadmap that we believe will help us capture the expanding addressable market for our products. We believe executing on our roadmap will position us to acquire new customers, offer a continuously improving experience to our existing customers, and grow follow-on purchases.
Key Metrics
In addition to the measures presented in our condensed consolidated financial statements, we use the following key metrics to evaluate our business, measure our performance, identify trends affecting our business and assist us in making operational and strategic decisions. Our key metrics are total revenue, products sold, Adjusted EBITDA, and Adjusted EBITDA margin. The most directly comparable financial measure calculated under U.S. GAAP for Adjusted EBITDA is net income. The most directly comparable financial measure calculated under U.S. GAAP for Adjusted EBITDA margin is net income margin.
|
|
Three Months Ended |
|
|||||
|
|
December 30, |
|
|
December 31, |
|
||
(In thousands, except percentages) |
|
|
|
|
|
|
||
Total revenue |
|
$ |
612,869 |
|
|
$ |
672,579 |
|
Products sold |
|
|
2,109 |
|
|
|
2,482 |
|
Net income |
|
|
80,947 |
|
|
|
75,188 |
|
Net income margin(1) |
|
|
13.2 |
% |
|
|
11.2 |
% |
Adjusted EBITDA(2) |
|
$ |
115,242 |
|
|
$ |
123,920 |
|
Adjusted EBITDA margin(2) |
|
|
18.8 |
% |
|
|
18.4 |
% |
Products Sold
Products sold represents the number of products that are sold during a period, net of returns and includes the sale of products in the Sonos speakers and Sonos system products categories, as well as module units sold through our partnerships with IKEA and Sonance from our Partner products and other revenue category. Growth rates between products sold and revenue are not perfectly correlated because our revenue is affected by other variables, such as the mix of products sold during the period, promotional discount activity, the introduction of new products that may have higher or lower than average selling prices, as well as the impact of recognition of previously deferred revenue.
Adjusted EBITDA and Adjusted EBITDA Margin
We define Adjusted EBITDA as net income adjusted to exclude the impact of stock-based compensation expense, depreciation and amortization, interest, other income (expense), 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. See "Non-GAAP Financial Measures" below for information regarding our use of Adjusted EBITDA and Adjusted EBITDA margin, and a reconciliation of net income to Adjusted EBITDA and net income margin to Adjusted EBITDA margin.
Non-GAAP Financial Measures
To supplement our condensed consolidated financial statements presented in accordance with U.S. GAAP, we monitor and consider Adjusted EBITDA and Adjusted EBITDA margin, which are non-GAAP financial measures. 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 define Adjusted EBITDA as net income adjusted to exclude the impact of depreciation and amortization, stock-based compensation expense, interest income, interest expense, other income (expense), income taxes, and
21
other items that we do not consider representative of underlying operating performance. We define Adjusted EBITDA margin as Adjusted EBITDA divided by revenue.
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 from 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.
Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with U.S. GAAP. There are a number of limitations related to the use of Adjusted EBITDA rather than net income, which is the nearest U.S. GAAP equivalent to Adjusted EBITDA, and the use of Adjusted EBITDA margin rather than net income margin, which is the nearest U.S. GAAP equivalent to Adjusted EBITDA margin. These limitations include that the non-GAAP financial measures:
Because of these limitations, these non-GAAP financial measures should be considered along with other operating and financial performance measures presented in accordance with U.S. GAAP.
22
The following table presents a reconciliation of net income to Adjusted EBITDA:
|
|
Three Months Ended |
|
|||||
|
|
December 30, |
|
|
December 31, |
|
||
(In thousands, except percentages) |
|
|
|
|
|
|
||
Net income |
|
$ |
80,947 |
|
|
$ |
75,188 |
|
Add (deduct): |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
11,878 |
|
|
|
11,132 |
|
Stock-based compensation expense |
|
|
19,358 |
|
|
|
20,195 |
|
Interest income |
|
|
(3,075 |
) |
|
|
(1,967 |
) |
Interest expense |
|
|
105 |
|
|
|
158 |
|
Other (income) expense, net |
|
|
(10,274 |
) |
|
|
(23,576 |
) |
Provision for income taxes |
|
|
11,992 |
|
|
|
36,501 |
|
Legal and transaction related costs(1) |
|
|
3,743 |
|
|
|
6,289 |
|
Restructuring and abandonment costs(2) |
|
|
568 |
|
|
|
— |
|
Adjusted EBITDA |
|
$ |
115,242 |
|
|
$ |
123,920 |
|
Revenue |
|
$ |
612,869 |
|
|
$ |
672,579 |
|
Net income margin |
|
|
13.2 |
% |
|
|
11.2 |
% |
Adjusted EBITDA margin |
|
|
18.8 |
% |
|
|
18.4 |
% |
Factors Affecting Performance
New product introductions. Since 2005, we have released products in multiple audio categories. We intend to introduce new products and services that appeal to a broad set of consumers, as well as bring our differentiated listening platform and experience to all the places and spaces where our customers listen to the breadth of audio content available, including inside and outside their homes, as well as commercial spaces.
Seasonality. Historically, we have typically experienced the highest levels of revenue in the first fiscal quarter of the year coinciding with the holiday shopping season and our promotional activities. Our promotional discounting activity is typically higher in the first fiscal quarter as well, which negatively impacts gross margin during this period. However, our higher sales volume in the holiday shopping season has historically resulted in a higher operating margin in the first fiscal quarter due to positive operating leverage.
Ability to Sell Additional Products to Existing Customers. Our existing customers typically increase the number of Sonos products in their homes. As we execute on our product roadmap to address evolving consumer preferences, we believe we can expand the number of products in our customers’ homes. Our ability to sell additional products to existing customers is a key part of our business model, as follow-on purchases indicate high customer engagement and satisfaction, decrease the likelihood of competitive substitution, and result in higher customer lifetime value. We will continue to innovate and invest in product development in order to enhance customer experience and drive sales of additional products to existing customers.
Channel strategy. We believe growing our own e-commerce channel will continue to be important to supporting our overall growth and profitability as consumers continue the shift from physical to online sales channels. We are investing in our e-commerce capabilities and in-app experience to drive direct sales.
While we seek to increase sales through our direct-to-consumer sales channel, we expect that our partnerships with third-party retailers and custom installers will continue to be an important part of our ecosystem. We will continue to seek retail partners that can deliver differentiated in-store experiences to support customer demand for product demonstrations. Additionally, we intend to expand and strengthen our partnerships with custom installers who are valuable to our customer base and contribute to our new household growth. Our physical retail distribution
23
relies on third-party retailers, our ability to maintain our diversified manufacturing footprint and base of component suppliers for production efficiency and flexibility across our global supply chain.
For additional information regarding factors affecting performance, refer to Risk Factors in Part II, Item 1A. of this Quarterly Report on Form 10-Q, Part I, Item 1. "Business - Factors Affecting Performance" of our Annual Report, and the Risk Factors in Part I, Item 1A. of our Annual Report.
Components of Results of Operations
Revenue
We generate substantially all of our revenue from the sale of Sonos speakers and Sonos system products. We also generate a portion of revenue from Partner products and other revenue sources, such as module revenue from our IKEA partnership, architectural speakers from our Sonance partnership, and accessories such as speaker stands and wall mounts, as well as professional services, licensing, advertising, and subscription revenue. We attribute revenue from our IKEA partnership to our Asia Pacific ("APAC") region, as our regional revenue is defined by the shipment location. Our revenue is recognized net of allowances for returns, discounts, sales incentives, and any taxes collected from customers. We also defer a portion of our revenue that is allocated to unspecified software upgrades and cloud-based services, as well as for newly launched products sold to resellers not recognized until the date of general availability is reached. Our revenue is subject to fluctuation based on the foreign currency in which our products are sold, principally for sales denominated in the euro and the British pound. The introduction of new products may result in an increase in revenue but may also impact revenue generated from existing products as consumers shift purchases to new products.
Cost of Revenue
Cost of revenue consists of product costs, including costs of our contract manufacturers for production, components, shipping and handling, tariffs, duty costs, warranty replacement costs, packaging, fulfillment costs, manufacturing and tooling equipment depreciation, warehousing costs, hosting costs, and excess and obsolete inventory write-downs. It also includes licensing costs, such as royalties to third parties, and attributable amortization of acquired developed technology. In addition, we allocate certain costs related to management and facilities, personnel-related expenses, and supply chain logistic costs. Personnel-related expenses consist of salaries, bonuses, benefits, and stock-based compensation expenses.
Gross Profit and Gross Margin
Our gross margin has fluctuated and may, in the future, fluctuate from period to period based on a number of factors, including the mix of products we sell, the channel mix through which we sell our products, fluctuations of the impacts of our product and material cost saving initiatives, the foreign currency in which our products are sold, and tariffs and duty costs implemented by governmental authorities.
Operating Expenses
Operating expenses consist of research and development, sales and marketing, and general and administrative expenses.
Research and development. Research and development expenses consist primarily of personnel-related expenses, consulting and contractor expenses, tooling, test equipment, prototype materials, and related overhead costs. To date, software development costs have been expensed as incurred because the period between achieving technological feasibility and the release of the software has been short and development costs qualifying for capitalization have been insignificant.
Sales and marketing. Sales and marketing expenses consist primarily of advertising and marketing activity for our products and personnel-related expenses, as well as trade show and event costs, sponsorship costs, consulting and contractor expenses, travel costs, depreciation for product displays, as well as related maintenance and repair expenses, customer experience and technology support tool expenses, revenue related sales fees from our direct-to-consumer business, and overhead costs.
24
General and administrative. General and administrative expenses consist of personnel-related expenses for our finance, legal, human resources and administrative personnel, as well as the costs of professional services, information technology, litigation, patents, related overhead, and other administrative expenses.
Other Income (Expense), Net
Interest income. Interest income consists primarily of interest income earned on our cash and cash equivalents balances.
Interest expense. Interest expense consists primarily of interest expense associated with our debt financing arrangements and amortization of debt issuance costs.
Other income (expense), net. Other income (expense), net consists primarily of our foreign currency exchange gains and losses relating to transactions and remeasurement of asset and liability balances denominated in currencies other than the U.S. dollar. We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates.
Provision for Income Taxes
We are subject to income taxes in the United States and foreign jurisdictions in which we operate. Foreign jurisdictions have statutory tax rates different from those in the United States. Accordingly, our effective tax rate will vary depending on jurisdictional mix of earnings, and changes in tax laws. In addition, certain U.S. tax regulations subject the earnings of our non-U.S. subsidiaries to current taxation in the United States. Our effective tax rate will be impacted by our ability to claim deductions and foreign tax credits to offset the taxation of foreign earnings in the United States.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided to reduce our deferred tax assets to amounts that are more-likely-than-not to be realized. We have assessed, on a jurisdictional basis, the available means of recovering deferred tax assets, including the ability to carry back net operating losses, the existence of taxable temporary differences, the availability of tax planning strategies and available sources of future taxable income. We have concluded that a valuation allowance on deferred tax assets in the U.S. continues to be appropriate considering cumulative pre-tax losses in recent years and uncertainty with respect to future taxable income. Release of the remaining valuation allowance would result in a benefit to income tax expense for the period the release is recorded, which could have a material impact on net earnings. The timing and amount of the potential valuation allowance release are subject to significant management judgment, as well as prospective earnings in the U.S.
25
Results of Operations
The following table sets forth our condensed consolidated results of operations for the periods indicated. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.
|
|
Three Months Ended |
|
|||||||||||||
|
|
December 30, |
|
|
December 31, |
|
||||||||||
(Dollars in thousands) |
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
||||
Revenue |
|
$ |
612,869 |
|
|
|
100.0 |
% |
|
$ |
672,579 |
|
|
|
100.0 |
% |
Cost of revenue (1) |
|
|
330,190 |
|
|
|
53.9 |
|
|
|
387,522 |
|
|
|
57.6 |
|
Gross profit |
|
|
282,679 |
|
|
|
46.1 |
|
|
|
285,057 |
|
|
|
42.4 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Research and development(1) |
|
|
79,235 |
|
|
|
12.9 |
|
|
|
76,940 |
|
|
|
11.4 |
|
Sales and marketing(1) |
|
|
83,950 |
|
|
|
13.7 |
|
|
|
78,696 |
|
|
|
11.7 |
|
General and administrative(1) |
|
|
39,799 |
|
|
|
6.5 |
|
|
|
43,117 |
|
|
|
6.4 |
|
Total operating expenses |
|
|
202,984 |
|
|
|
33.1 |
|
|
|
198,753 |
|
|
|
29.6 |
|
Operating income |
|
|
79,695 |
|
|
|
13.0 |
|
|
|
86,304 |
|
|
|
12.8 |
|
Other income (expense), net |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest income |
|
|
3,075 |
|
|
|
0.5 |
|
|
|
1,967 |
|
|
|
0.3 |
|
Interest expense |
|
|
(105 |
) |
|
|
— |
|
|
|
(158 |
) |
|
|
— |
|
Other income (expense), net |
|
|
10,274 |
|
|
|
1.7 |
|
|
|
23,576 |
|
|
|
3.5 |
|
Total other income (expense), net |
|
|
13,244 |
|
|
|
2.2 |
|
|
|
25,385 |
|
|
|
3.8 |
|
Income before provision for income taxes |
|
|
92,939 |
|
|
|
15.2 |
|
|
|
111,689 |
|
|
|
16.6 |
|
Provision for income taxes |
|
|
11,992 |
|
|
|
2.0 |
|
|
|
36,501 |
|
|
|
5.4 |
|
Net income |
|
$ |
80,947 |
|
|
|
13.2 |
% |
|
$ |
75,188 |
|
|
|
11.2 |
% |
Adjusted EBITDA (2) |
|
$ |
115,242 |
|
|
|
18.8 |
% |
|
$ |
123,920 |
|
|
|
18.4 |
% |
(1) Amounts include stock-based compensation expense as follows:
|
|
Three Months Ended |
|
|||||||||||||
|
|
December 30, |
|
|
December 31, |
|
||||||||||
(In thousands, except percentages) |
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
||||
Cost of revenue |
|
$ |
654 |
|
|
|
0.1 |
% |
|
$ |
570 |
|
|
|
0.1 |
% |
Research and development |
|
|
8,979 |
|
|
|
1.5 |
|
|
|
9,151 |
|
|
|
1.4 |
|
Sales and marketing |
|
|
3,815 |
|
|
|
0.6 |
|
|
|
4,113 |
|
|
|
0.6 |
|
General and administrative |
|
|
5,910 |
|
|
|
1.0 |
|
|
|
6,361 |
|
|
|
0.9 |
|
Total stock-based compensation expense |
|
$ |
19,358 |
|
|
|
3.2 |
% |
|
$ |
20,195 |
|
|
|
3.0 |
% |
(2) Adjusted EBITDA is a financial measure that is not calculated in accordance with U.S. GAAP. See the sections titled "Adjusted EBITDA and Adjusted EBITDA margin" and "Non-GAAP financial measures" above.
26
Comparison of the three months ended December 30, 2023, and December 31, 2022
Revenue
Comparison of the three months ended December 30, 2023, and December 31, 2022
|
|
Three Months Ended |
|
|
Change |
|
||||||||||||||||||
|
|
December 30, |
|
|
December 31, |
|
|
$ |
|
|
% |
|
||||||||||||
(In thousands, except percentages) |
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
||||||
Sonos speakers |
|
$ |
503,011 |
|
|
|
82.1 |
% |
|
$ |
539,196 |
|
|
|
80.2 |
% |
|
$ |
(36,185 |
) |
|
|
(6.7 |
)% |
Sonos system products |
|
|
84,562 |
|
|
|
13.8 |
|
|
|
114,434 |
|
|
|
17.0 |
|
|
|
(29,872 |
) |
|
|
(26.1 |
) |
Partner products and other revenue |
|
|
25,296 |
|
|
|
4.1 |
|
|
|
18,949 |
|
|
|
2.8 |
|
|
|
6,347 |
|
|
|
33.5 |
|
Total revenue |
|
$ |
612,869 |
|
|
|
100.0 |
% |
|
$ |
672,579 |
|
|
|
100.0 |
% |
|
$ |
(59,710 |
) |
|
|
(8.9 |
)% |
Volume data (products sold in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Units |
|
|
% |
|
||||||
Total products sold |
|
|
2,109 |
|
|
|
|
|
|
2,482 |
|
|
|
|
|
|
(373 |
) |
|
|
(15.0 |
)% |
||
Total revenue decreased $59.7 million, or 8.9%, for the three months ended December 30, 2023, compared to the three months ended December 31, 2022, primarily due to declines in our retail and other channels, as our channel partners normalized ordering levels, as well as softer demand across all regions and challenging market conditions, partially offset by the impact of favorable foreign exchange rates.
Sonos speakers revenue represented 82.1% of total revenue for the three months ended December 30, 2023, and decreased 6.7% compared to the three months ended December 31, 2022, primarily driven by expected declines in sales of Sonos One as we introduced the next generation of this product (Era 100), as well as Sub Mini due to the impact of lapping its launch in October 2022, and Beam, partially offset by Era 100 and Era 300 which were introduced in March 2023. Sonos system products represented 13.8% of total revenue for the three months ended December 30, 2023, and decreased 26.1% compared to the three months ended December 31, 2022, primarily due to normalization of ordering levels in this category. Partner products and other revenue represented 4.1% of total revenue for the three months ended December 30, 2023, and increased 33.5% compared to the three months ended December 31, 2022, primarily driven by increases in our accessories.
The volume of products sold decreased 15.0% for the three months ended December 30, 2023, compared to the three months ended December 31, 2022, primarily due to expected declines in units of Sonos One as we introduced the next generation of this product (Era 100), partially offset by strong performance of Era 100 and Era 300, which were introduced in March 2023. Products sold declined more than revenue on a percentage basis due to the impact of product mix with decreases in units with lower selling prices.
|
|
Three Months Ended |
|
|
Change |
|
|
|
|
|||||||||||
|
|
December 30, |
|
|
December 31, |
|
|
$ |
|
|
% |
|
|
Constant |
|
|||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Americas |
|
$ |
392,439 |
|
|
$ |
396,565 |
|
|
$ |
(4,126 |
) |
|
|
(1.0 |
)% |
|
|
(1.3 |
)% |
EMEA |
|
|
191,817 |
|
|
|
240,439 |
|
|
|
(48,622 |
) |
|
|
(20.2 |
) |
|
|
(24.5 |
) |
APAC |
|
|
28,613 |
|
|
|
35,575 |
|
|
|
(6,962 |
) |
|
|
(19.6 |
) |
|
|
(18.8 |
) |
Total revenue |
|
$ |
612,869 |
|
|
$ |
672,579 |
|
|
$ |
(59,710 |
) |
|
|
(8.9 |
)% |
|
|
(10.5 |
)% |
In constant currency U.S. dollars, total revenue decreased 10.5% for the three months ended December 30, 2023, compared to the three months ended December 31, 2022. We calculate constant currency growth percentages by translating our current period financial results using the prior period average currency exchange rates and comparing these amounts to our prior period reported results.
27
Cost of Revenue and Gross Profit
Comparison of the three months ended December 30, 2023, and December 31, 2022
|
|
Three Months Ended |
|
|
Change |
|
||||||||||
|
|
December 30, |
|
|
December 31, |
|
|
$ |
|
|
% |
|
||||
(In thousands, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of revenue |
|
$ |
330,190 |
|
|
$ |
387,522 |
|
|
$ |
(57,332 |
) |
|
|
(14.8 |
)% |
Gross profit |
|
$ |
282,679 |
|
|
$ |
285,057 |
|
|
$ |
(2,378 |
) |
|
|
(0.8 |
)% |
Gross margin |
|
|
46.1 |
% |
|
|
42.4 |
% |
|
|
|
|
|
|
||
Cost of revenue decreased $57.3 million, or 14.8%, for the three months ended December 30, 2023, compared to the three months ended December 31, 2022, primarily due to a decrease in products sold, as well as a decrease in product and material costs, reduced spot market component costs due to normalization of the supply chain, and a decrease in inventory-related write-downs. The decrease was partially offset by an increase in net tariff expense as we have recovered virtually all tariff refunds to which we were entitled by the end of fiscal 2023, compared to the first quarter of fiscal 2023 when we recognized tariff refunds.
Gross margin increased 374 basis points for the three months ended December 30, 2023, compared to the three months ended December 31, 2022. The increase was primarily due to a decrease in product and material costs, reduced spot market component costs due to normalization of the supply chain, a decrease in inventory-related write-downs, as well as the impact of favorable foreign exchange rates. The increase was partially offset by the impact of our promotional activity, as well as an increase in net tariff expense as we had recovered virtually all tariff refunds to which we were entitled by the end of fiscal 2023, compared to the first quarter of fiscal 2023 when we recognized tariff refunds.
Research and Development
Comparison of the three months ended December 30, 2023, and December 31, 2022
|
|
Three Months Ended |
|
|
Change |
|
||||||||||
|
|
December 30, |
|
|
December 31, |
|
|
$ |
|
|
% |
|
||||
(In thousands, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Research and development |
|
$ |
78,912 |
|
|
$ |
76,940 |
|
|
$ |
1,972 |
|
|
|
2.6 |
% |
Restructuring and abandonment costs |
|
|
323 |
|
|
|
- |
|
|
|
323 |
|
|
* |
|
|
Total research and development |
|
$ |
79,235 |
|
|
$ |
76,940 |
|
|
$ |
2,295 |
|
|
|
3.0 |
% |
Percentage of revenue |
|
|
12.9 |
% |
|
|
11.4 |
% |
|
|
|
|
|
|
||
* not meaningful |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Research and development expenses increased $2.3 million, or 3.0%, for the three months ended December 30, 2023, compared to the three months ended December 31, 2022. This increase was primarily driven by $3.8 million of higher personnel-related expenses mainly due to increased average headcount as we continue to execute on our product roadmap and category expansion plans.
28
Sales and Marketing
Comparison of the three months ended December 30, 2023, and December 31, 2022
|
|
Three Months Ended |
|
|
Change |
|
||||||||||
|
|
December 30, |
|
|
December 31, |
|
|
$ |
|
|
% |
|
||||
(In thousands, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Sales and marketing |
|
$ |
83,837 |
|
|
$ |
78,696 |
|
|
$ |
5,141 |
|
|
|
6.5 |
% |
Restructuring and abandonment costs |
|
|
113 |
|
|
|
- |
|
|
|
113 |
|
|
* |
|
|
Total sales and marketing |
|
$ |
83,950 |
|
|
$ |
78,696 |
|
|
$ |
5,254 |
|
|
|
6.7 |
% |
Percentage of revenue |
|
|
13.7 |
% |
|
|
11.7 |
% |
|
|
|
|
|
|
||
* not meaningful |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Sales and marketing expenses increased $5.3 million, or 6.7%, for the three months ended December 30, 2023, compared to the three months ended December 31, 2022. This increase was primarily driven by higher advertising and marketing expenses of $5.5 million, as well as increases in depreciation mainly related to our product displays, partially offset by lower revenue-related sales fees, and a decrease in personnel-related expenses due to decreased headcount related to the 2023 restructuring plan.
General and Administrative
Comparison of the three months ended December 30, 2023, and December 31, 2022
|
|
Three Months Ended |
|
|
Change |
|
||||||||||
|
|
December 30, |
|
|
December 31, |
|
|
$ |
|
|
% |
|
||||
(In thousands, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
General and administrative |
|
$ |
39,667 |
|
|
$ |
43,117 |
|
|
$ |
(3,450 |
) |
|
|
(8.0 |
)% |
Restructuring and abandonment costs |
|
|
132 |
|
|
|
- |
|
|
|
132 |
|
|
* |
|
|
Total general and administrative |
|
$ |
39,799 |
|
|
$ |
43,117 |
|
|
$ |
(3,318 |
) |
|
|
(7.7 |
)% |
Percentage of revenue |
|
|
6.5 |
% |
|
|
6.4 |
% |
|
|
|
|
|
|
||
* not meaningful |
|
|
|
|
|
|
|
|
|
|
|
|
||||
General and administrative expenses decreased $3.3 million, 7.7%, for the three months ended December 30, 2023, compared to the three months ended December 31, 2022, primarily related to a $2.5 million decrease in legal fees incurred in connection with our IP litigation and a $1.2 million decrease in investments in information technology to replace our legacy ERP system in fiscal 2022.
Interest Income, Interest Expense and Other Income (Expense), Net
Comparison of the three months ended December 30, 2023, and December 31, 2022
|
|
Three Months Ended |
|
|
Change |
|
||||||||||
|
|
December 30, |
|
|
December 31, |
|
|
$ |
|
|
% |
|
||||
(In thousands, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other income, net |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest income |
|
$ |
3,075 |
|
|
$ |
1,967 |
|
|
$ |
1,108 |
|
|
|
56.3 |
% |
Interest expense |
|
|
(105 |
) |
|
|
(158 |
) |
|
|
53 |
|
|
|
(33.5 |
) |
Other income, net |
|
|
10,274 |
|
|
|
23,576 |
|
|
|
(13,302 |
) |
|
|
(56.4 |
) |
Total other income, net |
|
$ |
13,244 |
|
|
$ |
25,385 |
|
|
$ |
(12,141 |
) |
|
|
(47.8 |
)% |
29
Interest income for the three months ended December 30, 2023, compared to the three months ended December 31, 2022, increased due to higher yields on our cash and cash equivalents. Interest expense for the three months ended December 30, 2023, compared to the three months ended December 31, 2022, decreased primarily due to reduced expenses associated with our Revolving Credit Agreement. The decrease in other income, net for the three months ended December 30, 2023, compared to the three months ended December 31, 2022, was due to foreign currency exchange fluctuations.
Provision for Income Taxes
Comparison of the three months ended December 30, 2023, and December 31, 2022
|
|
Three Months Ended |
|
|
Change |
|
||||||||||
|
|
December 30, |
|
|
December 31, |
|
|
$ |
|
|
% |
|
||||
(In thousands, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Provision for income taxes |
|
$ |
11,992 |
|
|
$ |
36,501 |
|
|
$ |
(24,509 |
) |
|
|
(67.1 |
)% |
The provision for income taxes decreased from $36.5 million for the three months ended December 31, 2022, to $12.0 million for the three months ended December 30, 2023.
For the three months ended December 30, 2023, we calculated our U.S. income tax provision using the discrete method as though the interim year-to-date period was an annual period. The application of the annual effective tax rate ("AETR") method generally required by ASC 740 was impractical for the U.S. interim tax provision as normal deviations in the projected pre-tax net income (loss) in the U.S. could have resulted in a disproportionate and unreliable effective tax rate under the AETR method. For the three months ended December 30, 2023, our U.S. tax expense was adversely impacted by the requirement to capitalize and amortize research and development expenses under Section 174 of the U.S. Internal Revenue Code ("Section 174") as we recorded a U.S. current tax expense with no corresponding deferred tax benefit due to the valuation allowance maintained against our U.S. deferred tax assets.
For the three months ended December 31, 2022, we recorded a provision for income taxes by applying an estimated AETR including the U.S. to year-to-date earnings in accordance with ASC 740. For the three months ended December 31, 2022, our U.S. tax expense was adversely impacted by the requirement to capitalize and amortize research and development expenses under Section 174 as we recorded a U.S. current tax expense with no corresponding deferred tax benefit due to the valuation allowance maintained against our U.S. deferred tax assets.
Liquidity and Capital Resources
Our operations are financed primarily through cash flows from operating activities and net proceeds from the sale of our equity securities. As of December 30, 2023, our principal sources of liquidity consisted of cash flows from operating activities, cash and cash equivalents of $467.3 million, including $77.7 million held by our foreign subsidiaries, proceeds from the exercise of stock options and borrowing capacity under the credit facility under our Revolving Credit Agreement. In accordance with our policy, the undistributed earnings of our non-U.S. subsidiaries remain indefinitely reinvested outside of the United States as of December 30, 2023, as they are required to fund needs outside of the United States. In the event funds from foreign operations are needed to fund operations in the United States and if U.S. tax has not already been previously provided, we may be required to accrue and pay additional U.S. taxes to repatriate these funds.
We believe our existing cash and cash equivalent balances, cash flows from operations and committed credit lines will be sufficient to meet our long-term working capital and capital expenditure needs for at least the next 12 months. We hold our cash with a diverse group of major financial institutions and have processes and safeguards in place to manage our cash balances and mitigate the risk of loss. In October 2021, we entered into a Revolving Credit Agreement with JPMorgan Chase Bank, N.A., as the administrative agent, Bank of America N.A., Morgan Stanley Senior Funding, Inc., and Goldman Sachs Bank USA, which allows us to borrow up to $100.0 million, with a maturity date of October 2026. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending on research and development efforts and other business initiatives, our planned sales and marketing activities, the timing of new
30
product introductions, our potential merger and acquisition activity, market acceptance of our products, and overall economic conditions. To the extent that current and anticipated sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in increased dilution to our stockholders. If we were to incur additional debt financing, it would result in increased debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations.
Debt Obligations
On October 13, 2021, we entered into the Revolving Credit Agreement. The Revolving Credit Agreement provides for (i) a five-year senior secured revolving credit facility in the amount of up to $100.0 million and (ii) an uncommitted incremental facility subject to certain conditions. Proceeds are to be used for working capital and general corporate purposes. The facility may be drawn as an Alternative Base Rate Loan (at 1.00% plus an applicable margin) or Term Benchmark Loan (SOFR plus an applicable margin). We must also pay (i) an unused commitment fee ranging from 0.200% to 0.275% per annum of the average daily unused portion of the aggregate revolving credit commitment under the agreement and (ii) a per annum fee equal to the applicable margin over SOFR multiplied by the aggregate face amount of outstanding letters of credit. As of December 30, 2023, we did not have any outstanding borrowings and had $1.8 million in undrawn letters of credit that reduce the availability under the Revolving Credit Agreement.
Our obligations under the Revolving Credit Agreement are secured by substantially all of our assets. The Revolving Credit Agreement contains customary representations and warranties, customary affirmative and negative covenants, a financial covenant that is tested quarterly and requires us to maintain a certain consolidated leverage ratio, and customary events of default. As of December 30, 2023, we were in compliance with all financial covenants under the Revolving Credit Agreement.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
|
|
Three Months Ended |
|
|||||
|
|
December 30, |
|
|
December 31, |
|
||
(In thousands) |
|
|
|
|
|
|
||
Net cash provided by (used in): |
|
|
|
|
|
|
||
Operating activities |
|
$ |
275,401 |
|
|
$ |
182,286 |
|
Investing activities |
|
|
(6,077 |
) |
|
|
(14,689 |
) |
Financing activities |
|
|
(23,691 |
) |
|
|
(15,316 |
) |
Effect of exchange rate changes |
|
|
1,478 |
|
|
|
4,397 |
|
Net increase in cash and cash equivalents |
|
$ |
247,111 |
|
|
$ |
156,678 |
|
Cash flows from operating activities
Net cash provided by operating activities of $275.4 million for the three months ended December 30, 2023, consisted of net income of $80.9 million, non-cash adjustments of $31.1 million, and a net increase in cash related to changes in operating assets and liabilities of $163.3 million. Non-cash adjustments primarily consisted of stock-based compensation expense of $19.4 million, depreciation and amortization of $11.9 million, provision for inventory obsolescence of $5.8 million, and other adjustments of $1.2 million, partially offset by foreign currency transaction gains of $7.4 million. The net increase in cash from the change in operating assets and liabilities was primarily due to a decrease in inventories of $167.6 million due to the seasonality of our business with higher sales during the holiday season, measures taken to more efficiently manage inventory, as well as the implementation of new payment terms with our suppliers, an increase in other liabilities of $18.6 million primarily for provisions for our returns consistent with the increase in revenue, an increase in accrued compensation of $6.0 million, and an increase in deferred revenue of $3.7 million. The net increase in cash from the change in operating assets and liabilities was partially offset by an increase in other assets of $12.9 million due to timing of prepaid contracts, an
31
increase in accounts receivable of $12.2 million, and decreases in accounts payable and accrued expenses of $7.4 million due to lower inventory purchases.
Cash flows from investing activities
Cash used in investing activities of $6.1 million for the three months ended December 30, 2023, primarily consisted of purchases of property and equipment mainly related to point-of-sale product displays and manufacturing-related tooling and test equipment to support the launch of new products.
Cash flows from financing activities
Cash used in financing activities of $23.7 million for the three months ended December 30, 2023, consisted of payments for repurchases of common stock of $23.5 million and payments for repurchases of common stock related to shares withheld for tax in connection with vesting of stock awards of $3.7 million, offset by proceeds from the exercise of stock options of $3.5 million.
Commitments and Contingencies
See Note 7. Commitments and Contingencies in the notes to condensed consolidated financial statements.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements, except as described above, and do not have any holdings in variable interest entities.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates.
Other than items discussed in Note 2 of our condensed consolidated financial statements, there have been no material changes to our critical accounting policies as compared to the critical accounting policies and significant judgments and estimates disclosed in our Annual Report on Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risks, including changes in currency exchange rates and interest rates. For quantitative and qualitative disclosures about market risk, refer to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K. Our exposure to market risk has not changed materially, except as follows:
Foreign Currency Risk
Our inventory purchases are primarily denominated in U.S. dollars. Our international sales are primarily denominated in foreign currencies and any movement in the exchange rate between the U.S. dollar and the currencies in which we conduct sales in foreign countries could have an impact on our revenue, principally for sales denominated in the euro and the British pound. A portion of our operating expenses are incurred outside the United States and are denominated in foreign currencies, which are also subject to foreign currency exchange rate fluctuations. In certain countries where we may invoice customers in the local currency our revenues benefit from a weaker dollar and are adversely affected by a stronger dollar. The opposite impact occurs in countries where we record expenses in local currencies. In those cases, our costs and expenses benefit from a stronger dollar and are adversely affected by a weaker dollar.
32
We do not currently use foreign exchange contracts or derivatives to hedge any foreign currency exposures. The volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy. Our continued international expansion increases our exposure to exchange rate fluctuations and, as a result, such fluctuations could have a significant impact on our future results of operations.
For the three months ended December 30, 2023, and December 31, 2022, we recognized a gain from foreign currency exchange of $10.1 million and $23.6 million, respectively. Based on transactions denominated in currencies other than U.S. dollar as of December 30, 2023, a hypothetical adverse change of 10% would have resulted in an adverse impact on income before provision for income taxes of approximately $11.1 million for the three months ended December 30, 2023.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required under Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended ("Exchange Act") as of December 30, 2023. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this Quarterly Report on Form 10-Q.
Changes in Internal Control
There were no changes in our internal control over financial reporting in management's evaluation pursuant to Rule 13a-15(f) during the quarter ended December 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. Other than the matters described in Note 7 of the notes to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, we were not a party to any legal proceedings that in the opinion of our management, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition, or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.
34
Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, as well as the other information in this Quarterly Report on Form 10-Q, including our consolidated financial statements and the related notes, and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before making an investment decision. The occurrence of any of the events or developments described below could materially and adversely affect our business, financial condition, results of operations and growth prospects. In such an event, the market price of our common stock could decline, and you may lose all or part of your investment. Additional risks and uncertainties not currently known to us or that we currently believe are not material may also impair our business, financial condition, results of operations and growth prospects.
Economic, Industry and Strategic Risk
To remain competitive and stimulate consumer demand, we must successfully manage frequent new product introductions and transitions.
Due to the quickly evolving and highly competitive nature of the home audio and broader consumer electronics industry, we must frequently introduce new products, enhance existing products and effectively stimulate customer demand for new and upgraded products in both mature and developing markets. For example, in March 2023, we introduced Sonos Era 100 and Sonos Era 300, our next generation of smart speakers; in September 2023, we introduced Move 2, our next generation of our Move speaker; and in April 2023, we introduced Sonos Pro, our new audio subscription service for businesses. The successful introduction of these products and any new products depends on a number of factors, such as the timely completion of development efforts to correspond with limited windows for market introduction. We face significant challenges in managing the risks associated with new product introductions and production ramp-up issues, including accurately forecasting initial consumer demand, effectively managing any third-party strategic alliances or collaborative partnerships related to new product development or commercialization, as well as the risk that new products may have quality or other defects in the early stages of introduction or may not achieve the market acceptance necessary to generate sufficient revenue. New and upgraded products can also affect the sales and profitability of existing products. Accordingly, if we cannot properly manage the introduction of new products, our operating results and financial condition may be adversely impacted, particularly if the cadence of new product introductions increases as we expect.
Although we have achieved profitability in the past, our results fluctuate, and we may not be able to regain or maintain, as applicable, profitability or consistent revenue growth and expect to incur increased operating costs in the future.
Although we were profitable in fiscal 2021 and fiscal 2022, we had a net loss of $10.3 million in fiscal 2023. As of December 30, 2023, we had retained earnings of $68.2 million.
We expect our operating expenses to increase in the future as we expand our operations and execute on our product roadmap and strategy. We plan to make future expenditures related to the expansion of our business and our product offerings, including investments in:
In order to regain or grow our profitability, we need to increase our revenue and we cannot assure you that we will be able to do so, particularly during times of global economic, social and political uncertainty. Our ability to achieve revenue growth will depend in part on our ability to execute on our product roadmap and strategy and to determine the market opportunity for new products. New product introductions may adversely impact our gross margin in the near to intermediate term due to the frequency of these product introductions and their anticipated increased share of our overall product volume. The expansion of our business and product offerings also places a continuous and significant strain on our management, operational and financial resources. In the event that we are unable to grow our revenue, or in the event that revenue grows more slowly than we expect, our operating results could be adversely affected, and our stock price could decrease.
35
If we are unable to accurately anticipate market demand for our products, we may have difficulty managing our production and inventory and our operating results could be harmed.
We must forecast production and inventory needs in advance with our suppliers and manufacturers, and our ability to do so accurately could be affected by many factors, including changes in customer demand and spending patterns, new product introductions, sales promotions, channel inventory levels, and general economic and political conditions. If we fail to accurately forecast consumer demand, we may experience excess inventory levels or a shortage of products available for sale, either of which could adversely impact our operating results and financial condition.
Following an increase in demand during the COVID-19 pandemic, we have seen a softening of consumer demand. As a result, we have had to, and may continue to, write-down or write-off inventory or sell the excess inventory at discounted prices, which has, and could in the future, cause our gross margin to suffer. In addition, excess inventory has, and may in the future, result in reduced working capital, which could adversely affect our ability to invest in other important areas of our business such as marketing and product development. If our channel partners have excess inventory of our products, they may decrease their purchases of our products in subsequent periods. In addition, in the event of excess inventory including excess component inventory, we may be unable to renegotiate our agreements with existing suppliers on mutually acceptable terms. Although in certain instances our agreements with certain suppliers allow us the option to cancel, reschedule, and adjust our requirements based on our business needs, our loss contingencies may include liabilities for contracts that we cannot cancel, reschedule or adjust with suppliers or partners. We may also deem it necessary or advisable to renegotiate agreements with our supply partners in order to scale our inventory with demand.
A resurgence of the COVID-19 pandemic could adversely impact our business and it remains uncertain how the post-COVID environment will impact demand for our products.
We experienced increased demand for our products during the COVID-19 pandemic and have recently seen a softening of consumer demand and a shift in consumer spending from purchasing goods to purchasing services and travel. It remains uncertain the extent to which the post-pandemic environment will impact demand for our products and services or shift consumer spending habits generally over the longer term.
Additionally, during the pandemic, consistent with its effects industry-wide, we experienced supply chain disruptions and challenges that increased costs and impacted our ability to meet demand and manage inventory levels. The pandemic also contributed to ongoing global economic uncertainty. Any resurgence of the pandemic could have similar impacts on our business, operating results and financial condition.
Global economic conditions and any associated impact on consumer discretionary spending could have a material adverse effect on our business, results of operations and financial condition.
Continued global economic uncertainty and reductions in consumer discretionary spending and consumer confidence may impact the sales of our products and services. Factors affecting the level of consumer spending for our products and services include general economic conditions, including the potential for an extended global recession, continued inflationary pressures, rising interest rates and, in certain markets, foreign currency exchange rate fluctuations. As global economic conditions continue to be volatile or economic uncertainty remains, trends in consumer discretionary spending also remain unpredictable. Unfavorable economic conditions may lead consumers to delay or reduce purchases of our products and services and consumer demand for our products and services may not grow as we expect. Any reduction in sales of our products and services resulting from reductions in consumer discretionary spending could have an adverse effect on our business, financial condition, and operating results.
The home audio and consumer electronics industries are highly competitive.
The markets in which we operate are extremely competitive and rapidly evolving, and we expect that competition will intensify in the future. Our competition includes established, well-known sellers of speakers and sound systems such as Bose, Samsung (and its subsidiaries Harman International and JBL), Sony, Bang & Olufsen, and Masimo (and its subsidiary Sound United that owns, among others, the Denon, Polk Audio and Bowers and Wilkens brands), and developers of voice-enabled speakers and systems such as Amazon, Apple and Google. We could also face competition from new market entrants, some of whom might be current partners of ours.
In order to deliver products that appeal to changing and increasingly diverse consumer preferences and to overcome the fact that a relatively high percentage of consumers may already own or use products that they perceive to be similar to those that we offer, we must develop superior technology, anticipate increasingly diverse consumer tastes and rapidly develop attractive products with competitive selling prices. In addition, many of our current and potential partners have business objectives that may drive them to sell their speaker products at a significant discount
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compared to ours. Amazon and Google, for example, both currently offer their speaker products at significantly lower prices than our speaker products. Many of these partners may subsidize these prices and seek to monetize their customers through the sale of additional services rather than the speakers themselves. Even if we are able to efficiently develop and offer innovative products at competitive selling prices, our operating results and financial condition may be adversely impacted if we are unable to effectively anticipate and counter the ongoing price erosion that frequently affects consumer products or if the average selling prices of our products decrease faster than we are able to reduce our manufacturing costs.
Many of our competitors have greater financial, technical and marketing resources available to them than those available to us, and, as a result, they may develop competing products that cause the demand for our products to decline. Our competitors have established, or may establish, cooperative relationships among themselves or with third parties to increase the abilities of their products to address the needs of our prospective customers, and other companies may enter our markets by entering into strategic relationships with our competitors. A failure to effectively anticipate and respond to these established and new competitors may adversely impact our business and operating results.
Further, our current and prospective competitors may consolidate with each other or acquire companies that will allow them to develop products that better compete with our products, which would intensify the competition that we face and may also disrupt or lead to termination of our distribution, technology and content partnerships. For example, if one of our competitors were to acquire one of our content partners, the consolidated company may decide to disable the streaming functionality of its service with our products.
If we are unable to compete with these consolidated companies or if consolidation in the market disrupts our partnerships or reduces the number of companies we partner with, our business would be adversely affected.
Our investments in research and development may not yield the results expected.
Our business operates in intensely competitive markets characterized by changing consumer preferences and rapid technological innovation. Due to advanced technological innovation and the relative ease of technology imitation, new products tend to become standardized more rapidly, leading to more intense competition and ongoing price erosion. In order to strengthen the competitiveness of our products in this environment, we continue to invest heavily in research and development. However, these investments may not yield the innovation or the results expected on a timely basis, or our competitors may surpass us in technological innovation, hindering our ability to timely commercialize new and competitive products that meet the needs and demands of the market, which consequently may adversely impact our operating results as well as our reputation.
If we are not successful in continuing to expand our direct-to-consumer sales channel by driving consumer traffic and consumer purchases through our website, our business and results of operations could be harmed.
We have invested significant resources in our direct-to-consumer sales channel, primarily through our website, and our future growth relies, in part, on our continued ability to attract consumers to this channel, which has and will continue to require significant expenditures in marketing, software development and infrastructure. If we are unable to continue to drive traffic to, and increase sales through, our website, our business and results of operations could be harmed. The continued success of direct-to-consumer sales through our website is subject to risks associated with e-commerce, many of which are outside of our control. Our inability to adequately respond to these risks and uncertainties or to successfully maintain and expand our direct-to-consumer business via our website may have an adverse impact on our results of operations.
Our efforts to expand beyond our core product offerings and offer products with wider applications may not succeed and could adversely impact our business.
We have, and may in the future continue to, seek to expand beyond our core sound systems and develop products that have wider applications outside of home sound, such as commercial or office. For example, in April 2023, we introduced Sonos Pro, our new audio subscription service for businesses. Developing these products would require us to devote substantial additional resources, and our ability to succeed in developing such products to address such markets is unproven. It is likely that we would need to hire additional personnel, partner with new third parties and incur considerable research and development expenses to pursue such an expansion successfully. We may have less familiarity with consumer preferences for these products and less product or category knowledge, and we could encounter difficulties in attracting new customers due to lower levels of consumer familiarity with our brand. As a result, we may not be successful in future efforts to achieve profitability from new markets, services or new types of products, and our ability to generate revenue from our existing products may suffer. If any such
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expansion does not enhance our ability to maintain or grow our revenue or recover any associated development costs, our operating results could be adversely affected.
We experience seasonal demand for our products, and if our sales in high-demand periods are below our forecasts, our overall financial condition and operating results could be adversely affected.
Given the seasonal nature of our sales, accurate forecasting is critical to our business. Our fiscal year ends on the Saturday closest to September 30; the holiday shopping season occurs in the first quarter of our fiscal year, and the typically slower summer months occur in the fourth quarter of our fiscal year. Historically, our revenue has been significantly higher in our first fiscal quarter due to increased consumer spending patterns during the holiday season. Any shortfalls in expected first fiscal quarter revenue, due to macroeconomic conditions like the potential for an extended global recession, product release patterns, a decline in the effectiveness of our promotional activities, supply chain disruptions, inflationary pressures or for any other reason, could cause our annual operating results to suffer significantly. In addition, if we fail to accurately forecast customer demand for the holiday season, we may experience excess inventory levels or a shortage of products available for sale, which could further harm our financial condition and operating results.
The success of our business depends in part on the continued growth of the voice-enabled speaker market and our ability to establish and maintain market share.
We have increasingly focused our product roadmap on voice-enabled speakers. We introduced our first voice-enabled speaker in 2017 and since then have introduced a total of eight voice-enabled speakers, as well as Sonos Voice Control, our proprietary voice assistant. If the voice-enabled speaker markets do not continue to grow or grow in unpredictable ways, our revenue may fall short of expectations and our operating results may be harmed, particularly since we incur substantial costs to introduce new products in advance of anticipated sales. Additionally, even if the market for voice-enabled speakers does continue to grow, we may not be successful in developing and selling speakers that appeal to consumers or gain sufficient market acceptance. To succeed in this market, we will need to design, produce and sell innovative and compelling products and partner with other businesses that enable us to capitalize on new technologies, some of which have developed or may develop and sell voice-enabled speaker products of their own as further described herein.
If market demand for streaming music does not grow as anticipated or the availability and quality of streaming services does not continue to increase, our business could be adversely affected.
A large proportion of our customer base uses our products to listen to content via subscription-based streaming music services. Accordingly, we believe our future revenue growth will depend in significant part on the continued expansion of the market for streaming music. The success of the streaming music market depends on the quality, reliability and adoption of streaming technology and on the continued success of streaming music services such as Apple Music, Spotify, Deezer, and Pandora. If the streaming music market in general fails to expand or if the streaming services that we partner with are not successful, demand for our products may suffer and our operating results may be adversely affected.
If we are unable to protect our intellectual property, the value of our brand and other intangible assets may be diminished, and our business may be adversely affected.
We rely and expect to continue to rely on a combination of confidentiality and license agreements with our employees, consultants and third parties with whom we have relationships, as well as patent, trademark, copyright and trade secret protection laws, to protect our proprietary rights. In the United States and certain other countries, we have filed various applications for certain aspects of our intellectual property, most notably patents. However, third parties may knowingly or unknowingly infringe our proprietary rights or challenge our proprietary rights, pending and future patent and trademark applications may not be approved, and we may not be able to prevent infringement without incurring substantial expense. Such infringement could have a material adverse effect on our brand, business, financial condition and results of operations. We have initiated legal proceedings to protect our intellectual property rights, and we may file additional actions in the future. For example, in January 2020 we filed a complaint with the ITC against Alphabet and Google and a counterpart lawsuit in the U.S. District Court for the Central District of California against Google alleging infringement of five Sonos patents, and in September 2020 we filed another lawsuit against Google alleging infringement of an additional four Sonos patents. See Note 7. Commitments and Contingencies of the notes to our condensed consolidated financial statements included elsewhere in this Form 10-Q for further details. The cost of defending our intellectual property has been and may in the future be substantial, and there is no assurance we will be successful. Our business could be adversely affected as a result of any such actions, or a finding that any patents-in-suit are invalid or unenforceable. These actions have led and may in the future lead to additional counterclaims or actions against us, which are expensive to defend
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against and for which there can be no assurance of a favorable outcome. For example, Google has responded to our legal proceedings by filing multiple patent infringement lawsuits against us in the U.S. District Court for the Northern District of California, cases against us in the ITC, and patent infringement lawsuits against us and our subsidiary Sonos Europe B.V. in various foreign jurisdictions. See Note 7. Commitments and Contingencies of the notes to our condensed consolidated financial statements included elsewhere in this Form 10-Q for further details. Further, parties we bring legal action against could retaliate through non-litigious means, which could harm our ability to compete against such parties or to enter new markets.
In addition, the regulations of certain foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States. As our brand grows, we may discover unauthorized products in the marketplace that are counterfeit reproductions of our products. If we are unsuccessful in pursuing producers or sellers of counterfeit products, continued sales of these products could adversely impact our brand, business, financial condition and results of operations.
We currently are, and may continue to be, subject to intellectual property rights claims and other litigation which are expensive to support, and if resolved adversely, could have a significant impact on us and our stockholders.
Companies in the consumer electronics industries own large numbers of patents, copyrights, trademarks, domain names and trade secrets, and frequently enter into litigation based on allegations of infringement, misappropriation or other violations of intellectual property or other rights. As we gain an increasingly high profile and face more intense competition in our markets, and as we introduce more products and services, including through acquisitions and through partners, the possibility of intellectual property rights claims against us grows. Our technologies may not be able to withstand any third-party claims or rights against their use, and we may be subject to litigation and disputes. The costs of supporting such litigation and disputes are considerable, and there can be no assurance that a favorable outcome would be obtained. We may be required to settle such litigation and disputes, or we may be subject to an unfavorable judgment in a trial, and the terms of a settlement or judgment against us may be unfavorable and require us to cease some or all our operations, limit our ability to use certain technologies, pay substantial amounts to the other party or issue additional shares of our capital stock to the other party, which would dilute our existing stockholders. Further, if we are found to have engaged in practices that are in violation of a third party’s rights, we may have to negotiate a license to continue such practices, which may not be available on reasonable or favorable terms, or may have to develop alternative, non-infringing technology or discontinue the practices altogether. In the event that these practices relate to an acquisition or a partner, we may not be successful in exercising any indemnification rights available to us under our agreements or in recovering damages in the event that we are successful. Each of these efforts could require significant effort and expense and ultimately may not be successful.
If we are not able to maintain and enhance the value and reputation of our brand, or if our reputation is otherwise harmed, our business and operating results could be adversely affected.
Our continued success depends on our reputation for providing high-quality products and consumer experiences, and the "Sonos" name is critical to preserving and expanding our business. Our brand and reputation are dependent on a number of factors, including our marketing efforts, product quality, and trademark protection efforts, each of which requires significant expenditures.
The value of our brand could also be severely damaged by isolated incidents, which may be outside of our control. For example, in the United States, we rely on custom installers of home audio systems for a significant portion of our sales but maintain no control over the quality of their work and thus could suffer damage to our brand or business to the extent such installations are unsatisfactory or defective. Any damage to our brand or reputation may adversely affect our business, financial condition and operating results.
Conflicts with our channel and distribution partners could harm our business and operating results.
Several of our existing products compete, and products that we may offer in the future could compete, with the product offerings of some of our significant channel and distribution partners who have greater financial and technical resources than we do. To the extent products offered by our partners compete with our products, they may choose to market and promote their own products over ours or could end our partnerships and cease selling or promoting our products entirely. Any reduction in our ability to place and promote our products, or increased competition for available shelf or website placement, especially during peak retail periods, such as the holiday shopping season, would require us to increase our marketing expenditures and to seek other distribution channels to promote our products. If we are unable to effectively sell our products due to conflicts with our distribution partners or the inability to find alternative distribution channels, our business would be harmed.
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The expansion of our direct-to-consumer channel could alienate some of our channel partners and cause a reduction in product sales from these partners. Channel partners may perceive themselves to be at a disadvantage based on the direct-to-consumer sales offered through our website. Due to these and other factors, conflicts in our sales channels could arise and cause channel partners to divert resources away from the promotion and sale of our products. Further, to the extent we use our mobile app to increase traffic to our website and increase direct-to-consumer sales, we will rely on application marketplaces such as the Apple App Store and Google Play to drive downloads of our mobile app. Apple and Google, both of which sell products that compete with ours, may choose to use their marketplaces to promote their competing products over our products or may make access to our mobile app more difficult. Any of these situations could adversely impact our business and results of operations.
Competition with our technology partners could harm our business and operating results.
We are dependent on a number of technology partners for the development of our products, some of which have developed or may develop and sell products that compete with our products. These technology partners may cease doing business with us or disable the technology they provide our products for a variety of reasons, including to promote their products over our own. For example, we are currently manufacturing and developing voice-enabled speaker systems that are enhanced with the technology of our partners, including those who sell competing products. Our existing voice-enabled speakers are powered by Amazon’s Alexa or Google’s Google Assistant technology. One or more of our partners could disable their integration on one or all of our voice-enabled products, terminate or not renew their distribution agreement with us, or begin charging us for their integration with our voice-enabled products. For example, our current agreement with Amazon allows Amazon to disable the Alexa integration in our voice-enabled products with limited notice. We cannot assure you that we will be successful in establishing partnerships with other companies that have developed voice-control enablement technology or in developing such technology on our own.
If one or more of our technology partners do not maintain their integration with our products or seek to charge us for this integration, or if we have not developed alternative partnerships for similar technology or developed such technology on our own, our sales may decline, our reputation may be harmed and our business and operating results may suffer.
Competition with our content partners could cause these partners to cease to allow their content to be streamed on our products, which could lower product demand.
Demand for our products depends in large part on the availability of streaming third-party content that appeals to our existing and prospective customers. Compatibility with streaming music services, podcast platforms and other content provided by our content partners is a key feature of our products. To date, all our arrangements have been entered into on a royalty-free basis. Some of these content partners compete with us already, and others may in the future produce and sell speakers along with their streaming services. Additionally, other content partners may form stronger alliances with our competitors in the home audio market. Any of our content partners may cease to allow their content to be streamed on our products for a variety of reasons, including as a result of our offering competing services, to promote other partnerships or their products over our products, or to seek to charge us for this streaming. If this were to happen, demand for our products could decrease, our costs could increase and our operating results could be harmed.
Operational Risks
We are dependent on a limited number of contract manufacturers to manufacture our products and our efforts to diversify manufacturers may not be successful.
We depend on a limited number of contract manufacturers to manufacture our products, with our key manufacturer, Inventec Appliances Corporation, manufacturing a majority of our products. We have also historically manufactured our products in China. In fiscal 2020, we began our efforts to diversify our supply chain through the addition of new contract manufacturers and geographic diversification, starting with Malaysia and extending such efforts into Vietnam in fiscal 2022. During fiscal 2023, we began the process of exiting certain partnerships with two of our contract manufacturers, including our second-largest contract manufacturer, and may exit other partnerships with contract manufacturers from time to time. Our reliance on a limited number of contract manufacturers increases the risk that, in the event that any or all of such manufacturers experience an interruption in their operations, fail to perform their obligation in a timely manner or terminate agreements with us, we would not be able to maintain our production capacity without incurring material additional costs and substantial delays or we may be fully prevented from selling our products. Any material disruption in our relationship with our
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manufacturers would harm our ability to compete effectively and satisfy demand for our products and could adversely impact our revenue, gross margin and operating results.
In addition, there is no guarantee that our efforts to diversify manufacturers will be successful. Identifying and onboarding a new manufacturer takes a significant amount of time and resources. If we do not successfully coordinate the timely manufacturing and distribution of our products by such manufacturers, if such manufacturers are unable to successfully and timely process our orders or if we do not receive timely and accurate information from such manufacturers, we may have an insufficient supply of products to meet customer demand, we may lose sales, we may experience a build-up in inventory, we may incur additional costs, and our financial performance and reporting may be adversely affected. By adding manufacturers in other countries, we may experience increased transportation costs, fuel costs, labor unrest, impact of natural disasters and other adverse effects on our ability, timing and cost of delivering products, which may increase our inventory, decrease our margins, adversely affect our relationships with distributors and other customers and otherwise adversely affect our operating results and financial condition.
We depend on a limited number of third-party components suppliers and logistics providers, and many of our components have long lead times, and our business and operating results could be adversely affected by shortages, disruptions and related challenges.
We are dependent on a limited number of suppliers for various key components used in our products, and we may from time to time have sole source suppliers. The cost, quality and availability of these components are essential to the successful production and sale of our products. We are subject to the risk of industry-wide shortages, price fluctuations and long lead times in the supply of these components and other materials. If the supply of these components is delayed or constrained, or if one or more of our main suppliers were to go out of business, alternative sources or suppliers may not be available on acceptable terms or at all. In the event that any of our suppliers were to discontinue production of our key product components, developing alternate sources of supply for these components would be time consuming, difficult and costly. In the event we are unable to obtain components in sufficient quantities on a timely basis and on commercially reasonable terms, our ability to sell our products in order to meet market demand would be affected and could materially and adversely affect our brand, image, business prospects and operating results.
In addition, the longer lead time for many of our components presents challenges in our efforts to manage component inventory, as we procure such components based on our then current forecast of demand for our products. For example, during the pandemic we increased our investments in, and purchase commitments for, components with longer lead times where possible to secure inventory in anticipation of shortages and strong demand, and we may need to do so again in the future. In the event that actual demand for our products differs from our forecast, we may end up with an excess inventory of components, as we saw in fiscal 2023 and the first quarter of fiscal 2024, negatively impacting our working capital.
We also use a small number of logistics providers for substantially all our product delivery to both distributors and retailers. If one of these providers were to experience financial difficulties or disruptions in its business, or be subject to closures or other disruptions, our own operations could be adversely affected. Because substantially all of our products are distributed from and into a small number of locations and by a small number of companies, we are susceptible to both isolated and system-wide interruptions caused by events out of our control. Any disruption to the operations of our distribution facilities could delay product delivery, harm our reputation among our customers and adversely affect our operating results and financial condition.
We have limited control over the third-party suppliers and logistics providers on which our business depends. If any of these parties fails to perform its obligations to us, we may be unable to deliver our products to customers in a timely manner. Further, we do not have long-term contracts with all of these parties, and there can be no assurance that we will be able to renew our contracts with them on favorable terms or at all. We may be unable to replace an existing supplier or logistics provider or supplement a provider in the event we experience significantly increased demand. Accordingly, a loss or interruption in the service of any key party could adversely impact our revenue, gross margin and operating results.
We sell our products through a limited number of key channel partners, and the loss of any such channel partner would adversely impact our business.
We are dependent on our channel partners for a vast majority of our product sales. Best Buy, one of our key channel partners, accounted for 17% of our revenue in fiscal 2023. We compete with other consumer products for placement and promotion of our products in the stores of our channel partners, including in some cases products of our channel partners. Our contracts with our channel partners allow them to exercise significant discretion in the
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placement and promotion of our products, and such contracts do not contain any long-term volume commitments. If one or several of our channel partners do not effectively market and sell our products, discontinue or reduce the inventory of our products, increase the promotions of or choose to promote competing products over ours, the volume of our products sold to customers could decrease, and our business and results of operations would therefore be significantly harmed. Many of our key channel partners temporarily closed or reduced operations in their retail stores at various times during the pandemic and may continue to do so in the future, which has had, and may continue to have, a material effect on our business and results of operations.
Revenue from our channel partners also depends on a number of factors outside our control and may vary from period to period. One or more of our channel partners may experience serious financial difficulty, particularly in light of the impact of the pandemic on the retail sector, may consolidate with other channel partners or may have limited or ceased operations. Our business and results of operations have been, and may continue to be, significantly harmed by retail store closures by many of our key channel partners. Loss of a key channel partner would require us to identify alternative channel partners or increase our reliance on our direct-to-consumer channel, which may be time-consuming and expensive or we may be unsuccessful in our efforts to do so.
We have and may in the future discontinue support for older versions of our products, resulting in customer dissatisfaction that could negatively affect our business and operating results.
We have historically maintained, and we believe our customers may expect, extensive backward compatibility for our older products and the software that supports them, allowing older products to continue to benefit from new software updates. We expect that as we continue to improve and enhance our software platform, this backward compatibility will no longer be practical or cost-effective, and we may decrease or discontinue service for our older products. For example, certain of our legacy products continue to work but no longer receive software updates (other than bug fixes and patches). To the extent we no longer provide extensive backward capability for our products, we may damage our relationship with our existing customers, as well as our reputation, brand loyalty and ability to attract new customers.
For these reasons, any decision to decrease or discontinue backward capability may decrease sales, generate legal claims and adversely affect our business, operating results and financial condition.
Product quality issues and a higher-than-expected number of warranty claims or returns could harm our business and operating results.
The products that we sell could contain defects in design or manufacture. Defects could also occur in the products or components that are supplied to us. There can be no assurance we will be able to detect and remedy all defects in the hardware and software we sell, which could result in product recalls, product redesign efforts, loss of revenue, reputational damage and significant warranty and other remediation expenses. Similar to other consumer electronics, our products have a risk of overheating and fire in the course of usage or upon malfunction. Any such defect could result in harm to property or in personal injury. If we determine that a product does not meet product quality standards or may contain a defect, the launch of such product could be delayed until we remedy the quality issue or defect. The costs associated with any protracted delay necessary to remedy a quality issue or defect in a new product could be substantial.
We generally provide a one-year warranty on all our products, except in the European Union ("EU") and select other countries where we provide a minimum two-year warranty, depending on the region, on all our products. The occurrence of any material defects in our products could expose us to liability for warranty claims in excess of our current reserves, and we could incur significant costs to correct any defects, warranty claims or other problems. In addition, our failure to comply with past, present and future laws regulating extended warranties and accidental damage coverage could result in reduced sales of our products, reputational damage, penalties and other sanctions, which could harm our business and financial condition.
Our international operations are subject to increased business and economic risks that could impact our financial results.
We have operations outside the United States, and we expect to continue to expand our international presence, especially in Asia. In fiscal 2023, 41.3% of our revenue was generated outside the United States. This subjects us to a variety of risks inherent in doing business internationally, including:
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If we are unable to manage the complexity of our global operations successfully, or if the risks above become substantial for us, our financial performance and operating results could suffer. Further, any measures that we may implement to reduce risks of our international operations may not be effective, may increase our expenses and may require significant management time and effort. Entry into new international markets requires considerable management time and financial resources related to market, personnel and facilities development before any significant revenue is generated. As a result, initial operations in a new market may operate at low margins or may be unprofitable.
We have significant operations in China, where many of the risks listed above are particularly acute. China experiences high turnover of direct labor due to the intensely competitive and fluid market for labor, and if our labor turnover rates are higher than we expect in that region, or we otherwise fail to adequately manage our labor needs, then our business and results of operations could be adversely affected.
We will need to improve our financial and operational systems to manage our growth effectively and support our increasingly complex business arrangements, and an inability to do so could harm our business and results of operations.
To manage our growth and our increasingly complex business operations, especially as we move into new markets internationally, we will need to upgrade our operational and financial systems and procedures, which requires management time and has resulted, and in the future may result, in significant additional expense. We cannot be certain that we will institute, in a timely or efficient manner or at all, the improvements to our managerial, operational and financial systems and procedures necessary to support our anticipated increased levels of operations. Problems associated with, or disruptions resulting from, any improvement or expansion of our operational and financial systems could adversely affect our relationships with our suppliers, manufacturers, resellers and customers, inhibit our ability to expand or take advantage of market opportunities, cause harm to our reputation, result in errors in our financial and other reporting, and affect our ability to maintain an effective internal control environment and meet our external reporting obligations, any of which could harm our business and operating results and affect our stock price.
A significant disruption in our websites, servers or information technology systems, or those of our third-party partners, could impair our customers’ listening experience or otherwise adversely affect our customers, damage our reputation or harm our business.
As a consumer electronics company, our website and mobile app are important presentations of our business, identity and brand and an important means of interacting with, and providing information to, consumers of our products. We depend on our servers and centralized information technology systems, and those of third parties, for product functionality, to manage operations and to store critical information and intellectual property. Accordingly, we allocate significant resources to maintaining our information technology systems and deploying network security, data encryption, training and other measures to protect against unauthorized access or misuse. Nevertheless, our website and information technology systems, and those of the third parties we rely on, are susceptible to damage, viruses, disruptions or shutdowns due to foreseeable and unforeseeable events. System failures and disruptions could impede the manufacturing and shipping of products, functionality of our products, transactions processing and financial reporting, and result in the loss of intellectual property or data, require
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substantial repair costs and damage our reputation, competitive position, financial condition and results of operations.
For example, we use Amazon Web Services ("AWS") to maintain the interconnectivity of our mobile app to our servers and those of the streaming services that our customers access to enjoy our products. Because AWS runs its own platform that we access, we are vulnerable to both system-wide and Sonos-specific service outages at AWS. Our access to AWS’ infrastructure could be limited by a number of potential causes, including technical failures, natural disasters, fraud or security attacks that we cannot predict or prevent.
Additionally, our products may contain flaws that make them susceptible to unauthorized access or use. For example, we previously discovered a vulnerability in our products that could be exploited when a customer visited a website with malicious content, allowing the customer’s local network to be accessed by third parties who could then gain unauthorized access to the customer’s playlists and other data and limited control of the customer’s devices. While we devote significant resources to address and eliminate flaws and other vulnerabilities in our products, there can be no assurance that our products will not be compromised in the future. Any such flaws or vulnerabilities, whether actual or merely potential, could harm our reputation, competitive position, financial condition and results of operations.
Any cybersecurity breaches or our actual or perceived failure to comply with such legal obligations by us, or by our third-party service providers or partners, could harm our business.
We collect, store, process and use our customers’ personally identifiable information and other data, and we rely on third parties that are not directly under our control to do so as well. While we take measures intended to protect the security, integrity and confidentiality of the personal information and other sensitive information we collect, store or transmit, we cannot guarantee that inadvertent or unauthorized use or disclosure will not occur, or that third parties will not gain unauthorized access to this information. There have been a number of recent reported incidents where third parties have used software to access the personal data of their partners’ customers for marketing and other purposes.
If we or our third-party service providers were to experience a breach, disruption or failure of systems compromising our customers’ data, or if one of our third-party service providers or partners were to access our customers’ personal data without our authorization, our brand and reputation could be adversely affected, use of our products could decrease and we could be exposed to a risk of loss, litigation and regulatory proceedings. In addition, a breach could require expending significant additional resources related to the security of information systems and disrupt our operations.
The use of data by our business and our business associates is highly regulated in all our operating countries. Privacy and information security laws and regulations change, and compliance with them may result in cost increases due to, among other things, systems changes and the development of new processes. If we or those with whom we share information fail to comply with laws and regulations, such as the General Data Protection Regulation ("GDPR") and California Consumer Privacy Act ("CCPA"), our reputation could be damaged, possibly resulting in lost business, and we could be subjected to additional legal risk or financial losses as a result of non-compliance. Complying with such laws may also require us to modify our data processing practices and policies and incur substantial expenditures.
Changes in how network operators manage data that travels across their networks or in net neutrality rules could harm our business.
We rely upon the ability of consumers to access our service through the internet. If network operators block, restrict or otherwise impair access to our service over their networks, our service and business could be negatively affected. To the extent that network operators implement usage-based pricing, including meaningful bandwidth caps, or otherwise try to monetize access to their networks by data providers, we could incur greater operating expenses. Furthermore, to the extent network operators create tiers of internet access service and either charge us for or prohibit us from being available through these tiers, our business could be negatively impacted.
Further, in the past, internet service providers ("ISPs") have attempted to implement usage-based pricing, bandwidth caps and traffic shaping or throttling. To the extent network operators create tiers of internet access service and charge our customers in direct relation to their consumption of audio content, our ability to attract and retain customers could be impaired, which would harm our business. Net neutrality rules, which were designed to ensure that all online content is treated the same by ISPs and other companies that provide broadband services, were repealed by the Federal Communications Commission ("FCC") effective June 2018. Although the FCC has preempted state jurisdiction over net neutrality, some states have taken executive action directed at reinstating
44
aspects of the FCC’s 2015 order. Further, while many countries, including across the EU, have implemented net neutrality rules, in others, the laws may be nascent or non-existent. The absence or repeal of the net neutrality rules could force us to incur greater operating expenses, cause our streaming partners to seek to shift costs to us or result in a decrease in the streaming-based usage of our platform by our customers, any of which would harm our results of operations. In addition, given uncertainty around these rules, including changing interpretations, amendments or repeal, coupled with potentially significant political and economic power of local network operators, we could experience discriminatory or anti-competitive practices that could impede our growth, cause us to incur additional expense or otherwise negatively affect our business.
Our use of open source software could negatively affect our ability to sell our products and subject us to possible litigation.
We incorporate open source software into our products, and we may continue to incorporate open source software into our products in the future. Open source software is generally licensed by its authors or other third parties under open source licenses. Some of these licenses contain requirements that we make available source code for modifications or derivative works we create based upon the open source software and that we license such modifications or derivative works under the terms of a particular open source license or other license granting third parties certain rights of further use. Additionally, if a third-party software provider has incorporated open source software into software that we license from such provider, we could be required to disclose any of our source code that incorporates or is a modification of our licensed software. If an author or other third party that distributes open source software that we use or license were to allege that we had not complied with the conditions of the applicable license, we could be required to incur significant legal expenses defending against those allegations and could be subject to significant damages, enjoined from offering or selling our products that contained the open source software and required to comply with the above conditions. Any of the foregoing could disrupt and harm our business and financial condition.
Legal and Regulatory Risks
Changes in international trade policies, including the imposition of tariffs have had, and may continue to have, an adverse effect on our business, financial condition and results of operations.
Under the previous administration, the U.S. government has imposed significant new tariffs on China related to the importation of certain product categories, including those under the August 2019 Section 301 Tariff Action (List 4A) ("Section 301 tariffs"). These Section 301 tariffs have increased our cost of revenue and adversely impacted our results of operations. We were able to obtain an exemption from the Section 301 tariffs for certain of our products, including our core speaker products, for certain periods since fiscal 2020. In particular, on December 16, 2022, the USTR granted an extension through September 30, 2023, of the exclusion for our core speaker products. To date, we have recovered virtually all refunds to which we are entitled on tariffs paid through fiscal 2022.
In the event that future tariffs are imposed on imports of our products, we are not successful in any future exemption requests, the amounts of existing tariffs are increased, our efforts to diversify our supply chain outside of China are delayed or otherwise not successful, or China or other countries take retaliatory trade measures in response to existing or future tariffs, our business may be impacted and we may be required to raise prices or make changes to our operations, any of which could materially harm our revenue or operating results. In response to future new tariffs, we may intensify our efforts to diversify outside of China, resulting in significant costs and disruption to our operations as we would need to pursue the time-consuming processes of recreating new supply chains, identifying substitute components and establishing new manufacturing locations.
We must comply with extensive regulatory requirements, and the cost of such compliance, and any failure to comply, may adversely affect our business, financial condition and results of operations.
In our current business and as we expand into new markets and product categories, we must comply with a wide variety of laws, regulations, standards and other requirements governing, among other things, electrical safety, wireless emissions, health and safety, e-commerce, consumer protection, export and import requirements, hazardous materials usage, product related energy consumption, packaging, recycling and environmental matters. Compliance with these laws, regulations, standards and other requirements may be onerous and expensive, and they may be inconsistent from jurisdiction to jurisdiction or change from time to time, further increasing the cost of compliance and doing business. Our products may require regulatory approvals or satisfaction of other regulatory concerns in the various jurisdictions in which they are manufactured, sold or both. These requirements create procurement and design challenges that require us to incur additional costs identifying suppliers and manufacturers who can obtain
45
and produce compliant materials, parts and products. Failure to comply with such requirements can subject us to liability, additional costs and reputational harm and, in extreme cases, force us to recall products or prevent us from selling our products in certain jurisdictions.
We may incur costs in complying with changing tax laws in the United States and abroad, which could adversely impact our cash flow, financial condition and results of operations.
We are a U.S.-based company subject to taxes in multiple U.S. and foreign tax jurisdictions. Our effective tax rate, as well as our business, operating results and financial condition, could be adversely affected by changes in the tax rules and regulations in the jurisdictions in which we do business, unanticipated changes in statutory tax rates and changes to our global mix of earnings. As we expand our operations, any changes in the U.S. or foreign taxation of such operations may increase our worldwide effective tax rate.
We are also subject to examination by the Internal Revenue Service ("IRS") and other tax authorities, including state revenue agencies and foreign governments. If any tax authority disagrees with any position we have taken, our tax liabilities and operating results may be adversely affected. While we regularly assess the likelihood of favorable or unfavorable outcomes resulting from examinations by the IRS and other tax authorities to determine the adequacy of our provision for income taxes, there can be no assurance that the actual outcome resulting from these examinations will not materially adversely affect our financial condition and results of operations. In addition, the distribution of our products subjects us to numerous complex and often-changing customs regulations. Failure to comply with these systems and regulations could result in the assessment of additional taxes, duties, interest and penalties. There is no assurance that tax and customs authorities agree with our reporting positions and upon audit may assess us additional taxes, duties, interest and penalties. If this occurs and we cannot successfully defend our position, our profitability will be reduced.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of September 30, 2023, we had gross state net operating loss carryforwards of $25.4 million, which expire beginning in 2032, as well as $46.9 million in foreign net operating loss carryforwards with an indefinite life. As of September 30, 2023, we also had U.S. federal research and development tax credit carryforwards as filed of $54.4 million, and state research and development tax credit carryforwards as filed of $47.0 million, which will expire beginning in 2038 and 2025, respectively. Because of the change of ownership provisions of Sections 382 and 383 of the Code, use of a portion of the Company's domestic net operating losses and tax credit carryforwards may be limited in future periods depending upon future changes in ownership. Further, a portion of the carryforwards may expire before being applied to reduce future income tax liabilities if sufficient taxable income is not generated in future periods.
Risks Related to Ownership of Our Common Stock
The stock price of our common stock has been and may continue to be volatile or may decline regardless of our operating performance.
The stock price of our common stock has been and may continue to be volatile. The stock price of our common stock may fluctuate significantly in response to numerous factors in addition to the ones described in the preceding Risk Factors, many of which are beyond our control, including:
46
In addition, the stock market with respect to companies in the technology industry has experienced significant price and volume fluctuations that have affected and continue to affect the stock prices of these companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business.
We do not intend to pay dividends for the foreseeable future.
We have never declared or paid any cash dividends on our common stock, and we do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of the Board. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments. In addition, the terms of our credit facilities contain restrictions on our ability to declare and pay cash dividends on our capital stock.
Certain provisions in our corporate charter documents and under Delaware law may prevent or hinder attempts by our stockholders to change our management or to acquire a controlling interest in us.
There are provisions in our restated certificate of incorporation and restated bylaws that may make it difficult for a third party to acquire, or attempt to acquire, control of our company, even if a change in control were considered favorable by our stockholders. These anti-takeover provisions include:
In addition, our restated certificate of incorporation provides that the Delaware Court of Chancery is the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law (the "DGCL"), our restated certificate of incorporation or our restated bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. Our restated certificate of incorporation also provides that the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act of 1933, as amended.
Further, Section 203 of the DGCL may discourage, delay or prevent a change in control of our company. Section 203 imposes certain restrictions on mergers, business combinations, and other transactions between us and holders of 15% or more of our common stock.
General Risk Factors
The loss of one or more of our key personnel, or our failure to attract, assimilate and retain other highly qualified personnel in the future, could harm our business.
We depend on the continued services and performance of our key personnel. The loss of key personnel, including key members of management as well as our product development, marketing, sales and technology personnel, could disrupt our operations and have an adverse effect on our ability to grow our business. In addition,
47
the loss of key personnel in our finance and accounting departments could harm our internal controls, financial reporting capability and capacity to forecast and plan for future growth. Further, the market for highly skilled workers and leaders in our industry is extremely competitive. If we do not succeed in attracting, hiring and then integrating high-quality personnel or in retaining and motivating existing personnel, we may be unable to grow effectively, and our financial condition may be harmed.
Natural disasters, geopolitical unrest, war, terrorism, pandemics, public health issues or other catastrophic events could disrupt the supply, delivery or demand of products, which could negatively affect our operations and performance.
We are subject to the risk of disruption by earthquakes, floods and other natural disasters, fire, power shortages, geopolitical unrest, war, terrorist attacks and other hostile acts, public health issues, epidemics or pandemics, including COVID-19, and other events beyond our control and the control of the third parties on which we depend. Any of these catastrophic events, whether in the United States or abroad, may have a strong negative impact on the global economy, us, our contract manufacturers, our suppliers or customers, and could decrease demand for our products, create delays and inefficiencies in our supply chain and make it difficult or impossible for us to deliver products to our customers. Further, our headquarters are located in Santa Barbara County, California, in a seismically active region that is also prone to forest fires. Any catastrophic event that occurred near our headquarters, or near our manufacturing facilities in China, Malaysia or Vietnam, could impose significant damage to our ability to conduct our business and could require substantial recovery time, which could have an adverse effect on our business, operating results and financial condition.
We may need additional capital, and we cannot be certain that additional financing will be available.
In October 2021, we entered into a credit agreement with JPMorgan Chase Bank, N.A., Bank of America N.A., Morgan Stanley Senior Funding, Inc., and Goldman Sachs Bank USA, which allows us to borrow up to $100.0 million, with a maturity date of October 2026. We may require additional equity or debt financing to fund our operations and capital expenditures. Our ability to obtain financing will depend, among other things, on our development efforts, business plans, operating performance and the condition of the capital markets at the time we seek financing. We cannot assure you that additional financing will be available to us on favorable terms if and when required, or at all.
We have and may in the future acquire other businesses or receive offers to be acquired, which could require significant management attention, disrupt our business, dilute stockholder value and adversely affect our operating results.
As part of our business strategy, we have and may in the future make investments in complementary businesses, products, services or technologies. These acquisitions and other transactions and arrangements involve significant challenges and risks, including not advancing our business strategy, receiving an unsatisfactory return on our investment, difficulty integrating and retaining new employees, business systems, and technology, or distracting management from our other business initiatives. If an arrangement fails to adequately anticipate changing circumstances and interests of a party, it may result in early termination or renegotiation of the arrangement. The success of these transactions and arrangements will depend in part on our ability to leverage them to enhance our existing products or develop compelling new ones. It may take longer than expected to realize the full benefits from these transactions and arrangements such as increased revenue or enhanced efficiencies, or the benefits may ultimately be smaller than we expected. These events could adversely affect our consolidated financial statements.
If we fail to maintain an effective system of internal controls in the future, we may experience a loss of investor confidence and an adverse impact to our stock price.
Pursuant to the Sarbanes-Oxley Act of 2002, we are required to document and test our internal control procedures and to provide a report by management on internal control over financial reporting, including management’s assessment of the effectiveness of such control. We previously reported and remediated material weaknesses in internal control over financial reporting. Completion of remediation does not provide assurance that our remediation or other controls will continue to operate properly. If we are unable to maintain effective internal control over financial reporting or disclosure controls and procedures, our ability to record, process and report financial information accurately, and to prepare consolidated financial statements within required time periods could be adversely affected, which could subject us to litigation or investigations requiring management resources and payment of legal and other expenses, negatively affect investor confidence in our consolidated financial statements and adversely impact our stock price.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
The following table presents information with respect to the Company's repurchase of common stock during the quarter ended December 30, 2023.
Period |
|
Total Number of Shares |
|
|
Average Price Paid per Share |
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
|
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
|
||||
Oct 1 - Oct 28 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
Oct 29 - Nov 25 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
200,000 |
|
Nov 26 - Dec 30 |
|
|
1,478,597 |
|
|
$ |
15.87 |
|
|
|
1,478,597 |
|
|
$ |
176,538 |
|
Total |
|
|
1,478,597 |
|
|
|
|
|
|
1,478,597 |
|
|
|
|
||
Item 3. Default Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
Rule 10b5-1 Trading Plans and Non-Rule 10b5-1 Trading Arrangements
On
49
Item 6. Exhibit Index
|
|
|
|
Incorporated by reference |
||||||||
Exhibit number |
|
Exhibit title |
|
Form |
|
File no. |
|
Exhibit |
|
Filing date |
|
Filed or furnished herewith |
31.1 |
|
|
|
|
|
|
|
|
|
|
X |
|
31.2 |
|
|
|
|
|
|
|
|
|
|
X |
|
32.1* |
|
|
|
|
|
|
|
|
|
|
X |
|
32.2* |
|
|
|
|
|
|
|
|
|
|
X |
|
101 |
|
The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended December 30, 2023, formatted in Inline XBRL: (i) Condensed consolidated balance sheets, (ii) Condensed consolidated statements of operations and comprehensive income, (iv) Condensed consolidated statements of stockholders' equity, (v) Condensed consolidated statements of cash flows and (vi) Notes to condensed consolidated financial statements, tagged as blocks of text and including detailed tags |
|
|
|
|
|
|
|
|
|
X |
104 |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
|
|
|
|
|
|
|
|
|
X |
*The certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and are not deemed "filed" for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall they be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.
50
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
Sonos, Inc. |
|
|
|
Date: February 6, 2024 |
By: |
/s/ Patrick Spence |
|
|
Patrick Spence |
|
|
Chief Executive Officer and Director |
|
|
(Principal Executive Officer) |
Date: February 6, 2024 |
By: |
/s/ Saori Casey |
|
|
Saori Casey |
|
|
Chief Financial Officer |
|
|
(Principal Financial Officer) |
Date: February 6, 2024 |
By: |
/s/ Chris Mason |
|
|
Chris Mason |
|
|
SVP, Finance and Chief Accounting Officer |
|
|
(Principal Accounting Officer) |
51