Sonos Inc [SONO] Filings

10-Q 1 sono-20240629.htm 10-Q sono-20240629

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________________________________________

FORM 10-Q


(Mark One)
x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 29, 2024


o			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: 001-38603

_________________________________________________________

SONOS, INC.

(Exact name of registrant as specified in its charter)

_________________________________________________________


Delaware		03-0479476
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

301 Coromar Drive	Santa Barbara	CA	93117
(Address of Principal Executive Offices)			(Zip Code)

(805) 965-3001

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

Common Stock, $0.001 par value	SONO	The Nasdaq Stock Market LLC

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. Yes x No o

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). Yes x No o

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.


Large accelerated filer	x	Accelerated filer	o

Non-accelerated filer	o	Smaller reporting company	o

		Emerging growth company	o

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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of July 26, 2024, the registrant had 121,009,890 shares of common stock outstanding.

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TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial statements (unaudited)

	Condensed consolidated balance sheets	3

	Condensed consolidated statements of operations and comprehensive income (loss)	4

	Condensed consolidated statements of stockholders' equity	5

	Condensed consolidated statements of cash flows	6

	Notes to condensed consolidated financial statements	7

Item 2.	Management’s discussion and analysis of financial condition and results of operations	22

Item 3.	Quantitative and qualitative disclosures about market risk	37

Item 4.	Controls and procedures	37

PART II. OTHER INFORMATION

Item 1.	Legal proceedings	39

Item 1A.	Risk factors	40

Item 2.	Unregistered sales of equity securities and use of proceeds	54

Item 3.	Defaults upon senior securities	55

Item 4.	Mine safety disclosures	55

Item 5.	Other information	55

Item 6.	Exhibit index	56

SIGNATURES		57

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PART I. FINANCIAL INFORMATION

Item 1. Financial statements

SONOS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except par values)


	As of
	June 29, 2024		September 30, 2023
Assets
Current assets:
Cash and cash equivalents	$	227,114	$	220,231
Marketable securities	49,515		—
Accounts receivable, net	131,581		67,583
Inventories	154,903		346,521
Prepaids and other current assets	41,343		25,296
Total current assets	604,456		659,631
Property and equipment, net	103,123		87,075
Operating lease right-of-use assets	53,030		48,918
Goodwill	80,980		80,420
Intangible assets, net
In-process research and development	70,706		69,791
Other intangible assets	15,748		20,218
Deferred tax assets	1,640		1,659
Other noncurrent assets	31,422		34,529
Total assets	$	961,105	$	1,002,241

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	179,327	$	187,981
Accrued expenses	88,958		89,717
Accrued compensation	33,059		22,079
Deferred revenue, current	20,796		20,188
Other current liabilities	44,741		34,253
Total current liabilities	366,881		354,218
Operating lease liabilities, noncurrent	53,050		54,956
Deferred revenue, noncurrent	62,190		60,650
Deferred tax liabilities	10,735		9,846
Other noncurrent liabilities	3,858		3,914
Total liabilities	496,714		483,584

Commitments and contingencies (Note 8)
Stockholders’ equity:
Common stock, $0.001 par value	126		130
Treasury stock	(72,323)		(72,586)
Additional paid-in capital	538,172		607,345
Retained earnings (accumulated deficit)	2,159		(12,788)
Accumulated other comprehensive loss	(3,743)		(3,444)
Total stockholders’ equity	464,391		518,657
Total liabilities and stockholders’ equity	$	961,105	$	1,002,241

The accompanying notes are an integral part of these condensed consolidated financial statements.

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SONOS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(unaudited, in thousands, except share and per share amounts)


	Three Months Ended				Nine Months Ended
	June 29, 2024		July 1, 2023		June 29, 2024		July 1, 2023
Revenue	$	397,146	$	373,356	$	1,262,676	$	1,350,108
Cost of revenue	205,505		201,594		676,320		761,672
Gross profit	191,641		171,762		586,356		588,436
Operating expenses
Research and development	74,223		77,758		233,780		235,484
Sales and marketing	71,643		66,600		217,428		208,917
General and administrative	33,186		48,665		113,825		136,219
Total operating expenses	179,052		193,023		565,033		580,620
Operating income (loss)	12,589		(21,261)		21,323		7,816
Other income, net
Interest income	2,629		2,391		9,638		7,540
Interest expense	(106)		(274)		(333)		(585)
Other income (expense), net	(2,464)		1,424		4,507		22,169
Total other income, net	59		3,541		13,812		29,124
Income (loss) before provision for income taxes	12,648		(17,720)		35,135		36,940
Provision for income taxes	8,939		5,851		20,188		15,974
Net income (loss)	$	3,709	$	(23,571)	$	14,947	$	20,966

Net income (loss) attributable to common stockholders:
Basic and diluted	$	3,709	$	(23,571)	$	14,947	$	20,966

Net income (loss) per share attributable to common stockholders:
Basic	$	0.03	$	(0.18)	$	0.12	$	0.16
Diluted	$	0.03	$	(0.18)	$	0.12	$	0.16

Weighted-average shares used in computing net income (loss) per share attributable to common stockholders:
Basic	122,553,129		128,311,109		123,828,150		127,825,410
Diluted	127,245,459		128,311,109		127,886,368		132,851,379

Total comprehensive income (loss)
Net income (loss)	3,709		(23,571)		14,947		20,966
Change in foreign currency translation adjustment	681		802		(267)		(1,882)
Net unrealized loss on marketable securities	(6)		—		(32)		—
Comprehensive income (loss)	$	4,384	$	(22,769)	$	14,648	$	19,084

The accompanying notes are an integral part of these condensed consolidated financial statements.

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SONOS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(unaudited, in thousands, except share amounts)


	Three Months Ended				Nine Months Ended
	June 29, 2024		July 1, 2023		June 29, 2024		July 1, 2023
Total stockholders' equity, beginning balances	$	494,004	$	612,914	$	518,657	$	560,512

Common stock
Beginning balances	$	128	$	130	$	130	$	130
Issuance of common stock pursuant to equity incentive plans	2		1		6		4
Retirement of treasury stock	(4)		(1)		(10)		(4)
Ending balances	$	126	$	130	$	126	$	130

Additional paid-in capital
Beginning balances	$	577,840	$	613,505	$	607,345	$	617,390
Issuance of common stock pursuant to equity incentive plans	4,405		2,459		16,306		20,038
Retirement of treasury stock	(66,003)		(24,833)		(150,440)		(87,517)
Stock-based compensation expense	21,930		18,329		64,961		59,549
Ending balances	$	538,172	$	609,460	$	538,172	$	609,460

Treasury stock
Beginning balances	$	(77,996)	$	(36,462)	$	(72,586)	$	(50,896)
Retirement of treasury stock	66,007		24,834		150,450		87,521
Repurchase of common stock	(52,820)		(15,009)		(129,430)		(45,063)
Repurchase of common stock related to shares withheld for tax in connection with vesting of stock awards	(7,514)		(5,715)		(20,757)		(23,914)
Ending balances	$	(72,323)	$	(32,352)	$	(72,323)	$	(32,352)

Retained earnings (accumulated deficit)
Beginning balances	$	(1,550)	$	42,022	$	(12,788)	$	(2,515)
Net income (loss)	3,709		(23,571)		14,947		20,966
Ending balances	$	2,159	$	18,451	$	2,159	$	18,451

Accumulated other comprehensive loss
Beginning balances	$	(4,418)	$	(6,281)	$	(3,444)	$	(3,597)
Change in foreign currency translation adjustment	681		802		(267)		(1,882)
Unrealized loss on investments	(6)		—		(32)		—
Ending balances	$	(3,743)	$	(5,479)	$	(3,743)	$	(5,479)

Total stockholders' equity, ending balances	$	464,391	$	590,210	$	464,391	$	590,210

Common stock shares:
Beginning balances	127,825,196		130,355,273		130,399,940		129,823,663
Issuance of common stock pursuant to equity incentive plans	1,582,772		1,271,122		4,911,125		5,416,539
Retirement of treasury stock	(3,885,878)		(1,224,309)		(9,788,975)		(4,838,116)
Ending balances	125,522,090		130,402,086		125,522,090		130,402,086

Treasury stock shares:
Beginning balances	(4,747,402)		(2,085,833)		(5,286,024)		(3,154,940)
Retirement of treasury stock	3,885,878		1,224,309		9,788,975		4,838,116
Repurchase of common stock	(3,253,468)		(932,029)		(7,777,208)		(2,548,184)
Repurchase of common stock related to shares withheld for tax in connection with vesting of stock awards	(433,871)		(367,984)		(1,274,606)		(1,296,529)
Ending balances	(4,548,863)		(2,161,537)		(4,548,863)		(2,161,537)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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SONOS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)


	Nine Months Ended
	June 29, 2024		July 1, 2023
Cash flows from operating activities
Net income	$	14,947	$	20,966
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense	64,961		59,549
Depreciation and amortization	35,154		35,054
Provision for inventory obsolescence	2,005		14,964
Restructuring and abandonment charges	266		5,125
Deferred income taxes	819		1,569
Other	2,973		4,270
Foreign currency transaction gains	(2,750)		(12,698)
Changes in operating assets and liabilities:
Accounts receivable	(64,218)		(13,934)
Inventories	189,613		141,054
Other assets	(15,285)		9,375
Accounts payable and accrued expenses	(16,942)		(204,012)
Accrued compensation	10,251		20,640
Deferred revenue	1,685		(4,093)
Other liabilities	4,161		382
Net cash provided by operating activities	227,640		78,211
Cash flows from investing activities
Purchases of marketable securities	(68,676)		—
Purchases of property and equipment	(39,477)		(40,085)
Maturities of marketable securities	20,000		—
Net cash used in investing activities	(88,153)		(40,085)
Cash flows from financing activities
Payments for repurchase of common stock	(128,739)		(45,063)
Payments for repurchase of common stock related to shares withheld for tax in connection with vesting of stock awards	(20,757)		(23,914)
Proceeds from exercise of common stock options	16,312		20,042
Net cash used in financing activities	(133,184)		(48,935)
Effect of exchange rate changes on cash and cash equivalents	580		4,240
Net increase (decrease) in cash and cash equivalents	6,883		(6,569)
Cash and cash equivalents
Beginning of period	220,231		274,855
End of period	$	227,114	$	268,286
Supplemental disclosure
Cash paid for interest	$	195	$	780
Cash paid for taxes, net of refunds	$	17,134	$	5,217
Cash paid for amounts included in the measurement of lease liabilities	$	9,637	$	10,599
Supplemental disclosure of non-cash investing and financing activities
Purchases of property and equipment in accounts payable and accrued expenses	$	9,910	$	7,129
Right-of-use assets obtained in exchange for new operating lease liabilities	$	11,277	$	31,547
Change in estimate of asset retirement obligations	$	—	$	2,185

The accompanying notes are an integral part of these condensed consolidated financial statements.

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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, headphones 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 60 countries through its wholly owned subsidiaries: Sonos Europe B.V. in the Netherlands, Beijing Sonos Technology Co. Ltd. in China, Sonos Japan GK in Japan, and Sonos Australia Pty Ltd. in Australia.

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 and nine months ended June 29, 2024, 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 nine months ended June 29, 2024 and July 1, 2023, spanned 39 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 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.

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SONOS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(unaudited)

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.

Marketable securities

The Company’s marketable securities consist of U.S. Treasury securities. Management determines the appropriate classification of its marketable securities at the time of purchase and reevaluates such determination at each balance sheet date. The Company classifies its marketable securities as available-for-sale and reports them at fair value in the condensed consolidated balance sheets, with unrealized gains and losses recorded in accumulated other comprehensive (income) loss. If securities are sold prior to maturity, the cost of securities sold is based on the specific identification method. Realized gains and losses on the sale of securities are recorded in other income (expense), net in the condensed consolidated statement of operations and comprehensive income (loss).

For securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more-likely-than-not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through earnings. For securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in accumulated other comprehensive loss in the condensed consolidated balance sheets.

Recent accounting pronouncements pending adoption

In December 2023, the Financial Accounting Standards Board ("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.

In November 2023, the 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.

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SONOS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(unaudited)

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 Company utilizes the following fair value hierarchy to establish priorities of the inputs used to measure fair value:

•Level 1: Quoted prices in active markets for identical assets or liabilities.

•Level 2: Observable inputs other than quoted market prices included in Level 1, such as quoted prices for similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

The following table summarizes fair value measurements by level for the assets measured at fair value on a recurring basis as of June 29, 2024 and September 30, 2023:


	June 29, 2024
	Level 1		Level 2		Level 3		Total
(In thousands)
Assets:
Cash equivalents:
Money market funds	$	30,289	$	—	$	—	$	30,289
U.S. Treasury securities	—		1,247		—		1,247
Total cash equivalents	30,289		1,247				31,536
Marketable Securities:
U.S. Treasury securities	—		49,515		—		49,515
Total marketable securities	—		49,515		—		49,515
Total assets	$	30,289	$	50,762	$	—	$	81,051


	September 30, 2023
	Level 1		Level 2		Level 3		Total
(In thousands)
Assets:
Cash equivalents:
Money market funds	$	51,522	$	—	$	—	$	51,522
Total Assets	$	51,522	$	—	$	—	$	51,522

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SONOS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(unaudited)

4. Financial Instruments

The Company classifies its marketable securities as available-for-sale and reports them at fair value in the condensed consolidated balance sheets, with unrealized gains and losses recorded in accumulated other comprehensive income (loss). Classification of the Company's marketable securities in the condensed consolidated balance sheets is based on each instrument’s underlying contractual maturity date. Securities with an original maturity of three months or less at time of purchase are recorded in cash and cash equivalents. Securities with an original maturity of greater than three months but less than one year are recorded in marketable securities. As of June 29, 2024, the Company held no securities with original maturities exceeding one year. Realized gains and losses on the sale of securities are recorded in other income (expense), net in the condensed consolidated statements of operations and comprehensive income (loss).

The following is a summary of marketable securities as of June 29, 2024 (in thousands):


	June 29, 2024
	Amortized Cost		Unrealized Gain		Unrealized Loss		Estimated Fair Value
Marketable securities:
U.S. Treasury securities	$	50,794	$	1	$	(33)	$	50,762
Total marketable securities	$	50,794	$	1	$	(33)	$	50,762

Reported in:
Cash and cash equivalents							$	1,247
Marketable securities							49,515
Total							$	50,762

The Company held no marketable securities as of September 30, 2023. There were no realized gains or losses on sales of marketable securities during the three and nine months ended June 29, 2024. For securities in an unrealized loss position, the Company evaluated whether the decline in fair value resulted from credit losses or other factors and concluded these amounts were related to temporary fluctuations in value of the securities and were due primarily to changes in interest rates and market conditions of the underlying securities. The Company does not intend to sell the securities, and it is more-likely-than-not that it will not be required to sell before recovery of their amortized cost basis. Accordingly, an allowance for credit losses was deemed unnecessary for these securities as of June 29, 2024.

The Company has elected the practical expedient to exclude the applicable accrued interest from both the fair value and the amortized cost basis of its marketable securities for the purpose of identifying and measuring impairment. The Company presents accrued interest receivable related to its marketable securities in prepaid and other current assets, separate from marketable securities, on its condensed consolidated balance sheets. Accrued interest receivable related to our marketable securities was immaterial as of June 29, 2024. The Company's accounting policy is to not measure an allowance for credit losses for accrued interest receivable and to write-off any uncollectible accrued interest receivable as a reversal of interest income in a timely manner, which it considers to be in the period in which it determines the accrued interest will not be collected. No accrued interest receivables were written off during the three and nine months ended June 29, 2024.

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SONOS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(unaudited)

5. 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:


	Three Months Ended				Nine Months Ended
	June 29, 2024		July 1, 2023		June 29, 2024		July 1, 2023
(In thousands)
Americas	$	264,611	$	251,616	$	827,238	$	844,714
Europe, Middle East and Africa ("EMEA")	110,902		105,312		372,074		434,806
Asia Pacific ("APAC")	21,633		16,428		63,364		70,588
Total revenue	$	397,146	$	373,356	$	1,262,676	$	1,350,108

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				Nine Months Ended
	June 29, 2024		July 1, 2023		June 29, 2024		July 1, 2023
(In thousands)
United States	$	248,094	$	237,211	$	765,639	$	785,062
Other countries	149,052		136,145		497,037		565,046
Total revenue	$	397,146	$	373,356	$	1,262,676	$	1,350,108

Revenue by product category also includes the applicable service revenue for software upgrades and cloud-based services attributable to each product category. In June 2024, the Company introduced its first-ever headphones, Sonos Ace, included within the Sonos speakers category. Revenue by major product category is as follows:


	Three Months Ended				Nine Months Ended
	June 29, 2024		July 1, 2023		June 29, 2024		July 1, 2023
(In thousands)
Sonos speakers	$	301,105	$	289,740	$	991,378	$	1,070,117
Sonos system products	75,186		64,224		209,013		222,748
Partner products and other revenue	20,855		19,392		62,285		57,243
Total revenue	$	397,146	$	373,356	$	1,262,676	$	1,350,108

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6. Balance Sheet Components

Accounts receivable, net

Accounts receivable, net consist of the following:


	June 29, 2024		September 30, 2023
(In thousands)
Accounts receivable	$	178,713	$	99,369
Allowance for credit losses	(2,565)		(2,711)
Allowance for sales incentives	(44,567)		(29,075)
Accounts receivable, net of allowances	$	131,581	$	67,583

Inventories

Inventories consist of the following:


	June 29, 2024		September 30, 2023
(In thousands)
Finished goods	$	102,403	$	281,571
Component parts	52,500		64,950
Inventories	$	154,903	$	346,521

As of June 29, 2024 and September 30, 2023, inventory write-downs were $28.3 million and $29.7 million, respectively.

Goodwill

The following table presents the changes in carrying amount of goodwill during the nine months ended June 29, 2024:


(In thousands)
Balance as of September 30, 2023	$	80,420
Effect of exchange rate changes on goodwill	560
Balance as of June 29, 2024	$	80,980

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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:


	June 29, 2024
	Gross Carrying Amount		Accumulated Amortization		Foreign Currency Translation		Net Carrying Value		Weighted-Average Remaining Life
(In thousands, except weighted-average remaining life)
Trade name	$	451	$	(167)	$	(6)	$	278	3.75
Technology-based	31,480		(16,010)		—		15,470		4.57
Total finite-lived intangible assets	31,931		(16,177)		(6)		15,748		4.56
In-process research and development not subject to amortization	71,759		—		(1,053)		70,706
Total intangible assets	$	103,690	$	(16,177)	$	(1,059)	$	86,454

The following table summarizes the estimated future amortization expense of the Company's intangible assets as of June 29, 2024:


Fiscal years ending	Future Amortization Expense
(In thousands)
Remainder of fiscal 2024	$	1,493
2025	3,369
2026	3,040
2027	3,024
2028	2,908
2029 and thereafter	1,914
Total future amortization expense	$	15,748

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 and were as follows:


	June 29, 2024		September 30, 2023
Cloud computing implementation costs	$	24,601	$	24,177
Less: accumulated amortization	8,825		6,207
Cloud computing implementation costs, net	$	15,776	$	17,970

Amortization expenses for implementation costs for cloud-based computing arrangements for the three and nine months ended June 29, 2024, were $0.9 million and $2.6 million, respectively. Amortization expenses for implementation costs for cloud-based computing arrangements for the three and nine months ended July 1, 2023, were $0.9 million and $2.8 million, respectively.

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Accrued expenses

Accrued expenses consisted of the following:


	June 29, 2024		September 30, 2023
(In thousands)
Accrued inventory and supply chain costs	$	40,858	$	48,384
Accrued taxes	16,181		11,410
Accrued advertising and marketing	13,208		13,029
Accrued general and administrative expenses	10,109		9,924
Accrued product development	2,845		4,298
Other accrued payables	5,757		2,672
Total accrued expenses	$	88,958	$	89,717

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 nine months ended July 1, 2023, includes $9.2 million of deferred revenue from the fourth quarter of fiscal 2022, related to newly launched products sold to resellers not recognized as revenue until the date general availability was reached, which was the first quarter of fiscal 2023.

The following table presents the changes in the Company’s deferred revenue:


	Nine Months Ended
	June 29, 2024		July 1, 2023
(In thousands)
Deferred revenue, beginning of period	$	80,838	$	83,470
Recognition of revenue included in beginning of period deferred revenue	(17,723)		(21,049)
Revenue deferred, net of revenue recognized on contracts in the respective period	19,871		19,844
Deferred revenue, end of period	$	82,986	$	82,265

The Company expects the following recognition of deferred revenue as of June 29, 2024:


	For the fiscal years ending
	Remainder of 2024		2025		2026		2027		2028 and Beyond		Total
(In thousands)
Deferred revenue expected to be recognized	$	5,853	$	19,668	$	17,286	$	14,640	$	25,539	$	82,986

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Other current liabilities

Other current liabilities consist of the following:


	June 29, 2024		September 30, 2023
(In thousands)
Reserve for returns	$	23,338	$	21,462
Warranty liability	8,790		7,466
Short-term operating lease liabilities	7,722		1,153
Other	4,891		4,172
Total other current liabilities	$	44,741	$	34,253

The following table presents the changes in the Company’s warranty liability:


	June 29, 2024		July 1, 2023
(In thousands)
Warranty liability, beginning of period	$	7,466	$	5,771
Provision for warranties issued during the period	13,363		10,670
Settlements of warranty claims during the period	(12,039)		(7,472)
Warranty liability, end of period	$	8,790	$	8,969

7. Debt

On October 13, 2021, the Company entered into a Revolving Credit Agreement with JPMorgan Chase Bank, N.A., as the administrative agent, and Bank of America N.A., Morgan Stanley Senior Funding, Inc., and Goldman Sachs Bank USA as the other lenders party thereto (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. In June 2023, the Company amended the Revolving Credit Agreement, replacing prior references to LIBOR with references to SOFR as a result of the discontinuation of LIBOR. The facility may be drawn as an Alternative Base Rate Loan (at 1.00% plus an applicable margin) or Term Benchmark Loan (at the Term SOFR Rate, plus the applicable Term SOFR Adjustment ranging from 0.11% to 0.43%, plus an applicable margin (in total, "Adjusted Term SOFR")). The Company 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 Adjusted Term SOFR multiplied by the aggregate face amount of outstanding letters of credit. As of June 29, 2024, the Company 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.

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 June 29, 2024, the Company was in compliance with all financial covenants under the Revolving Credit Agreement.

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8. Commitments and Contingencies

Commitments to suppliers

As of June 29, 2024, the Company's open purchase orders to contract manufacturers for finished goods were approximately $142 million, the majority of which are expected to be paid over the next six months. As of June 29, 2024, the Company's expected commitments to suppliers for components were in the range of $280 million to $320 million, the majority of which is expected to be paid and/or utilized by our contract manufacturers in building finished goods within the next two years. The expected commitments are subject to change as a result of fluctuations in the demand forecast, as well as ongoing negotiations with contract manufacturers and suppliers. These commitments are related to components that can be specific to Sonos products and include the following: 1) indirect obligations to third-party manufacturers and suppliers, 2) the inventory owned by contract manufacturers procured to manufacture Sonos products, and 3) purchase commitments made by contract manufacturers to their upstream suppliers on behalf of the Company.

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 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 Company and Google each appealed the ITC’s determination, which was upheld in its entirety by a panel of the appeals court. Google has filed a petition for rehearing by the full appeals court. A decision is expected on this petition in August 2024.

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 $32.5 million based on a royalty rate of $2.30 per infringing unit. After trial, the court held Sonos’ patents unenforceable under the doctrine of prosecution laches and invalid as a result of amendments made during prosecution. The Company is appealing the ruling.

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.

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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 2024, the Company received a judgment from the German Federal Patent Court invalidating one of the patents. Google has now dismissed its case against Sonos concerning this 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 appealed the Munich court's ruling and, in April 2024, the appellate court in Munich rendered a judgment dismissing Google's appeal.

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 appealed the French trial court's March 2022 and November 2023 rulings. In April 2024, Google dismissed its appeal of the November 2023 ruling, which is now final. In May 2024, Google's appeal of the March 2022 judgment was decided against Google and in favor of Sonos.

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 appealed this decision, which appeal was stayed in April 2024.

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. The first ITC investigation concluded in December 2023 with a final determination of no violation by the Company. Google chose not to appeal this determination. 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 two patents in this case. The Company denies the allegations. The claims at issue have been held unpatentable by the U.S. Patent and Trademark Office. Implicit has appealed this ruling, which is currently scheduled to be heard by the appeals court in 2024. There is no assurance of a favorable outcome and the Company’s business could be adversely affected as a result of a finding that the Company patents-in-suit are invalid and/or unenforceable. A range of loss, if any, associated with this matter is not probable or reasonably estimable as of June 29, 2024.

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.

9. Stockholders' Equity

On November 15, 2023, the Board of Directors (the "Board") authorized a common stock repurchase program of up to $200.0 million. During the nine months ended June 29, 2024, the Company repurchased 7,777,208 shares for an aggregate purchase price of $128.7 million at an average price of $16.54 per share under the

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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repurchase program. Aggregate purchase price and average price per share exclude commission and excise tax. As of January 1, 2023, the Company's share repurchases in excess of issuances are subject to a 1% excise tax enacted by the Inflation Reduction Act. Any excise tax incurred is recognized as part of the cost basis of the shares acquired in the condensed consolidated statements of equity. The Company had $71.3 million available for share repurchases under the repurchase program as of June 29, 2024.

Treasury stock during the nine months ended June 29, 2024, included 1,274,606 shares withheld to satisfy employees' tax withholding requirements in connection with vesting of stock awards. Additionally, during the nine months ended June 29, 2024, the Company retired 9,788,975 shares of treasury stock.

10. 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) 5% of the total outstanding shares of the Company’s common stock and common stock equivalents as of the immediately preceding January 1 (rounded to the nearest whole share) and (y) a number of shares determined by the Company's Board.

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 48 months, on a monthly or quarterly basis, with certain options subject to an initial annual cliff vest and are exercisable for a period not to exceed ten years from the date of grant.

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	8,549,957	$	13.99	3.6	$	1,689
Exercised	(1,282,266)	$	12.72
Forfeited	(25,582)	$	14.37
Outstanding at June 29, 2024	7,242,109	$	14.21	3.1	$	5,424

As of June 29, 2024 and September 30, 2023, all outstanding stock options have vested and the Company had no unrecognized stock-based compensation expense related to stock options.

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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 four years, with certain awards subject to an initial annual cliff vest. The summary of the Company’s RSU activity is as follows:


	Number of Units	Weighted-Average Grant Date Fair Value		Aggregate Intrinsic Value
				(In thousands)
Outstanding at September 30, 2023	7,662,035	$	19.42	$	98,917
Granted	9,294,757	$	11.90
Released	(3,573,089)	$	16.34
Forfeited	(926,096)	$	15.84
Outstanding at June 29, 2024	12,457,607	$	14.96	$	183,874
At June 29, 2024
Units expected to vest	10,483,861	$	15.06	$	154,742

As of June 29, 2024 and September 30, 2023, the Company had $137.6 million and $111.6 million of unrecognized stock-based compensation expense related to RSUs, which are expected to be recognized over weighted-average periods of 2.5 and 2.4 years, respectively.

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 nine months ended June 29, 2024, includes performance achievement adjustments of a net reduction of 25,057 units. The summary of the Company’s PSU activity is as follows:


	Number of Units	Weighted-Average Grant Date Fair Value		Aggregate Intrinsic Value
				(In thousands)
Outstanding at September 30, 2023	265,191	$	21.27	$	3,424
Granted	499,716	$	17.64
Released	(80,827)	$	23.35

Outstanding at June 29, 2024	684,080	$	18.37	$	10,097

As of June 29, 2024 and September 30, 2023, the Company had $3.8 million and $0.3 million of unrecognized stock-based compensation expense related to PSUs, which are expected to be recognized over weighted-average periods of 1.7 and 1.2 years, respectively.

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Stock-based compensation

Total stock-based compensation expense by functional category was as follows:


	Three Months Ended				Nine Months Ended
	June 29, 2024		July 1, 2023		June 29, 2024		July 1, 2023
(In thousands)
Cost of revenue	$	655	$	450	$	1,995	$	1,601
Research and development	9,735		8,637		29,133		27,353
Sales and marketing	4,510		3,590		13,297		12,178
General and administrative	7,030		5,652		20,536		18,417
Total stock-based compensation expense	$	21,930	$	18,329	$	64,961	$	59,549

11. Income Taxes

The Company’s income 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 $8.9 million and $5.9 million for the three months ended June 29, 2024 and July 1, 2023, respectively, related to U.S. and non-U.S. income taxes.

The Company recorded a provision for income taxes of $20.2 million and $16.0 million for the nine months ended June 29, 2024 and July 1, 2023, respectively, related to U.S. and non-U.S. income taxes.

For the three and nine months ended June 29, 2024, and July 1, 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, was not utilized to calculate the U.S. interim income tax provision given that 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 and nine months ended June 29, 2024, and July 1, 2023, the Company's U.S. income tax provision 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 nine months ended June 29, 2024, 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. It is possible that within the next 12 months there may be sufficient positive evidence to release a portion or all of the remaining valuation allowance. Release of the valuation allowance in the U.S. would result in a benefit to the income tax provision in 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.

12. Net Income (Loss) Per Share

Basic net income (loss) per share attributable to common stockholders is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding less shares subject to repurchase. Diluted net income (loss) per share attributable to common

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stockholders adjusts the basic net income (loss) 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.

The following table sets forth the computation of the Company’s basic and diluted net income (loss) per share attributable to common stockholders:


	Three Months Ended				Nine Months Ended
	June 29, 2024		July 1, 2023		June 29, 2024		July 1, 2023
(In thousands, except share and per share data)
Numerator:
Net income (loss) attributable to common stockholders - basic and diluted	$	3,709	$	(23,571)	$	14,947	$	20,966
Denominator:
Weighted-average shares of common stock—basic	122,553,129		128,311,109		123,828,150		127,825,410
Effect of potentially dilutive stock options	1,116,000		—		956,598		2,164,370
Effect of RSUs	3,543,526		—		3,085,571		2,807,869
Effect of PSUs	32,804		—		16,049		53,730
Weighted-average shares of common stock—diluted	127,245,459		128,311,109		127,886,368		132,851,379
Net income (loss) per share attributable to common stockholders:
Basic	$	0.03	$	(0.18)	$	0.12	$	0.16
Diluted	$	0.03	$	(0.18)	$	0.12	$	0.16

The following potentially dilutive shares were excluded from the computation of diluted net income (loss) per share attributable to common stockholders because including them would have been antidilutive:


	Three Months Ended		Nine Months Ended
	June 29, 2024	July 1, 2023	June 29, 2024	July 1, 2023
Stock options to purchase common stock	6,371,604	9,035,818	6,998,738	7,525,339
Restricted stock units	9,556,879	9,569,869	9,828,619	7,429,364
Performance stock units	187,255	180,762	88,030	119,754
Total	16,115,738	18,786,449	16,915,387	15,074,457

13. 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 $2.5 million for the three months ended June 29, 2024 and July 1, 2023, respectively. The Company's matching contributions totaled $7.4 million and $7.2 million for the nine months ended June 29, 2024 and July 1, 2023, respectively.

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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, timing of certain tax impacts 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. In June 2024, we introduced Sonos Ace, marking Sonos' entry into the personal listening category. Today, our product lineup includes wireless, portable, and home theater speakers, headphones, 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 100 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. In May 2024, we launched an extensive redesign of our Sonos app. We rebuilt the app from the ground up with the purpose of improving the user experience through a modern user interface and to provide a modular developer platform allowing us to drive more innovation faster in the future. 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, home theater speakers and beginning in June 2024, headphones, from our Sonos system products, which largely comprises

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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.

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 (loss). The most directly comparable financial measure calculated under U.S. GAAP for Adjusted EBITDA margin is net income (loss) margin.


	Three Months Ended						Nine Months Ended
	June 29, 2024			July 1, 2023			June 29, 2024			July 1, 2023
(In thousands, except percentages)
Total revenue	$	397,146		$	373,356		$	1,262,676		$	1,350,108
Products sold	1,280			1,208			4,135			4,688
Net income (loss)	$	3,709		$	(23,571)		$	14,947		$	20,966
Net income (loss) margin(1)	0.9		%	(6.3		%)	1.2		%	1.6		%
Adjusted EBITDA(2)	$	48,906		$	34,304		$	130,506		$	147,600
Adjusted EBITDA margin(2)	12.3		%	9.2		%	10.3		%	10.9		%

(1)Net income (loss) margin is calculated by dividing net income (loss) by revenue.

(2)For additional information regarding Adjusted EBITDA and Adjusted EBITDA margin (which are non-GAAP financial measures), including reconciliations of net income (loss) to Adjusted EBITDA, see the section titled "Non-GAAP Financial Measures" below.

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, changes to selling prices, as well as the impact of recognition of previously deferred revenue.

Non-GAAP Financial Measures

To supplement our condensed consolidated financial statements presented in accordance with U.S. GAAP, we monitor and consider Adjusted EBITDA, Adjusted EBITDA margin, and constant currency 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 (loss) adjusted to exclude the impact of depreciation and amortization, stock-based compensation expense, interest income, interest expense, other income (expense), income taxes, legal and transaction related costs, restructuring and abandonment costs, and other items that we do not consider representative of underlying operating performance. We define Adjusted EBITDA margin as Adjusted EBITDA divided by revenue.

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We also present percentage sales growth in constant currency to show performance unaffected by fluctuations in currency exchange rates. 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.

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 (loss), which is the nearest U.S. GAAP equivalent to Adjusted EBITDA, and the use of Adjusted EBITDA margin rather than net income (loss) margin, which is the nearest U.S. GAAP equivalent to Adjusted EBITDA margin. These limitations include that the non-GAAP financial measures:

•exclude depreciation and amortization, and although these are non-cash expenses, the assets being depreciated may be replaced in the future;

•exclude stock-based compensation expense, which has been, and will continue to be, a significant recurring expense for our business and an important part of our compensation strategy;

•do not reflect interest income, primarily resulting from interest income earned on our cash, cash equivalents, and marketable securities balances;

•do not reflect interest expense, or the cash requirements necessary to service interest or principal payments on our debt, which reduces cash available to us;

•do not reflect the effect of foreign currency exchange gains or losses, which is included in other income (expense), net;

•do not reflect the provision for or benefit from income tax that may result in payments that reduce cash available to us;

•do not reflect items that are not considered representative of our underlying operating performance which may reduce cash available to us; and

•may not be comparable to similar non-GAAP financial measures used by other companies, because the expenses and other items that we exclude in our calculation of these non-GAAP financial measures may differ from the expenses and other items, if any, that other companies may exclude from these non-GAAP financial measures when they report their operating results.

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.

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The following table presents a reconciliation of net income (loss) to Adjusted EBITDA:


	Three Months Ended						Nine Months Ended
	June 29, 2024			July 1, 2023			June 29, 2024			July 1, 2023
(In thousands, except percentages)
Net income (loss)	$	3,709		$	(23,571)		$	14,947		$	20,966
Add (deduct):
Depreciation and amortization	12,032			12,209			35,154			35,054
Stock-based compensation expense	21,930			18,329			64,961			59,549
Interest income	(2,629)			(2,391)			(9,638)			(7,540)
Interest expense	106			274			333			585
Other (income) expense, net	2,464			(1,424)			(4,507)			(22,169)
Provision for income taxes	8,939			5,851			20,188			15,974
Legal and transaction related costs(1)	1,062			14,699			7,202			30,006
Restructuring and abandonment costs(2)	1,293			10,328			1,866			15,175
Adjusted EBITDA	$	48,906		$	34,304		$	130,506		$	147,600
Revenue	$	397,146		$	373,356		$	1,262,676		$	1,350,108
Net income (loss) margin	0.9		%	(6.3		%)	1.2		%	1.6		%
Adjusted EBITDA margin	12.3		%	9.2		%	10.3		%	10.9		%

(1)Legal and transaction-related costs consist of expenses related to our intellectual property ("IP") litigation against Alphabet and Google, as well as legal and transaction costs associated with our acquisition activity, which we do not consider representative of our underlying operating performance.

(2)Restructuring and abandonment costs for the three and nine months ended June 29, 2024 and July 1, 2023, are primarily related to our restructuring plan initiated on June 14, 2023, and also costs incurred in March 2023 related to the abandonment of portions of our office spaces.

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.

In May 2024, we launched an extensive redesign of our Sonos app. We rebuilt the app from the ground up with the purpose of improving the user experience through a modern user interface and to provide a modular developer platform allowing us to drive more innovation faster in the future. App improvements are being rolled out on an ongoing basis following issues experienced by our partners and customers. Due to the ongoing improvements being made to resolve the outstanding issues with the Sonos app, we are delaying the introduction of two new products originally planned for the fourth quarter of fiscal 2024.

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

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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 relies on third-party retailers and 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 architectural speakers from our Sonance partnership, accessories such as speaker stands and wall mounts, 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.

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 mix of channels through which we sell our products, fluctuations in our product and material cost saving initiatives, fluctuations in our product and material markets, promotional activity, 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.

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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.

General and administrative. General and administrative expenses consist of administrative personnel-related expenses for our finance, legal, human resources and similar personnel, as well as the costs of professional services, information technology, litigation, patents, related overhead, and other administrative expenses.

Interest Income, Interest Expense, and Other Income (Expense), Net

Interest income. Interest income consists primarily of interest income earned on our cash, cash equivalents, and marketable securities 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. It is possible that within the next 12 months there may be sufficient positive evidence to release a portion or all of the remaining valuation allowance. 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.

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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								Nine Months Ended
	June 29, 2024				July 1, 2023				June 29, 2024				July 1, 2023
(Dollars in thousands)	$		%		$		%		$		%		$		%
Revenue	$	397,146	100.0	%	$	373,356	100.0	%	$	1,262,676	100.0	%	$	1,350,108	100.0	%
Cost of revenue(1)	205,505		51.7		201,594		54.0		676,320		53.6		761,672		56.4
Gross profit	191,641		48.3		171,762		46.0		586,356		46.4		588,436		43.6
Operating expenses
Research and development(1)	74,223		18.7		77,758		20.8		233,780		18.5		235,484		17.4
Sales and marketing(1)	71,643		18.0		66,600		17.8		217,428		17.2		208,917		15.5
General and administrative(1)	33,186		8.4		48,665		13.0		113,825		9.0		136,219		10.1
Total operating expenses	179,052		45.1		193,023		51.7		565,033		44.7		580,620		43.0
Operating income (loss)	12,589		3.2		(21,261)		(5.7)		21,323		1.7		7,816		0.6
Other income, net
Interest income	2,629		0.7		2,391		0.6		9,638		0.8		7,540		0.6
Interest expense	(106)		—		(274)		(0.1)		(333)		—		(585)		—
Other income (expense), net	(2,464)		(0.6)		1,424		0.4		4,507		0.4		22,169		1.6
Total other income, net	59		—		3,541		0.9		13,812		1.1		29,124		2.2
Income (loss) before provision for income taxes	12,648		3.2		(17,720)		(4.7)		35,135		2.8		36,940		2.7
Provision for income taxes	8,939		2.3		5,851		1.6		20,188		1.6		15,974		1.2
Net income (loss)	$	3,709	0.9	%	$	(23,571)	(6.3	%)	$	14,947	1.2	%	$	20,966	1.6	%
Adjusted EBITDA (2)	$	48,906	12.3	%	$	34,304	9.2	%	$	130,506	10.3	%	$	147,600	10.9	%

(1)Amounts include stock-based compensation expense as follows:


	Three Months Ended								Nine Months Ended
	June 29, 2024				July 1, 2023				June 29, 2024				July 1, 2023
(In thousands, except percentages)	$		%		$		%		$		%		$		%
Cost of revenue	$	655	0.2	%	$	450	0.1	%	$	1,995	0.2	%	$	1,601	0.1	%
Research and development	9,735		2.5		8,637		2.3		29,133		2.3		27,353		2.0
Sales and marketing	4,510		1.1		3,590		1.0		13,297		1.1		12,178		0.9
General and administrative	7,030		1.8		5,652		1.5		20,536		1.6		18,417		1.4
Total stock-based compensation expense	$

Sonos Inc [SONO] Filings
10-Q	[2024-08-08]
10-Q	[2024-05-08]
10-Q	[2024-02-07]
10-K	[2023-11-20]
10-Q	[2023-08-10]
10-Q	[2023-05-11]
10-Q	[2023-02-09]
10-K	[2022-11-23]
10-Q	[2022-08-11]
10-Q	[2022-05-12]
10-Q	[2022-02-10]
10-K	[2021-11-22]
10-Q	[2021-08-12]
10-Q	[2021-05-13]
10-Q	[2021-02-11]
10-K	[2020-11-23]
10-Q	[2020-08-06]
10-Q	[2020-05-07]
10-Q	[2020-02-06]
10-K	[2019-11-26]
10-Q	[2019-08-08]
10-Q	[2019-05-10]
10-Q	[2019-02-07]
10-K	[2018-11-28]
10-Q	[2018-09-11]
S-1	[2018-07-06]