Sonos Inc (SONO) 2018 Q4 法說會逐字稿

Good afternoon. My name is Chris, and I'll be your conference operator today. At the time, I would like to welcome everyone to Sonos Fourth Quarter and Fiscal 2018 Earnings Call. (Operator Instructions) Mike Groeninger, you may begin the conference.

Thank you. Good afternoon, and welcome to Sonos' Fourth Quarter 2018 Earnings Conference Call. I am Mike Groeninger, VP of Corporate Finance, and with me today are Sonos' CEO, Patrick Spence; and CFO, Michael Giannetto.

For those joining the call early, today's hold music was the Q4 playlist included in our shareholder letter. The all-female playlist was inspired by Sonos' participation in the Grace Hopper Celebration in October, which has become the world's largest gathering of women in technology.

Before I hand it over to Patrick, I'd like to remind everyone that today's discussion will include forward-looking statements regarding future events and our future financial performance. These statements reflect our views as of today only and should not be considered as representing our views of any subsequent date. These statements are also subject to material risks and uncertainties that could cause actual results to differ materially from expectations reflected in the forward-looking statements. A discussion of these risk factors is fully detailed under the caption Risk Factors in our filings with the SEC.

During this call, we will also refer to non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDA margin. For complete information regarding our non-GAAP financial information and a quantitative reconciliation of those measures, please refer to today's shareholder letter regarding our Fourth Quarter Fiscal 2018 results, posted in the Investor Relations portion of our website.

With that, I'll turn it over to Patrick Spence.

Thanks, Mike, and hello, everyone. Thanks for joining us today. I hope you've had a chance to review the letter -- our shareholder letter that Mike referenced. We'll continue to provide lot of color in our shareholder letters in advance of these call, so you don't have to sit through the pain of Mike and I reading a set of lengthy prepared remarks, and we can focus largely on your questions.

That said, I just want to highlight 3 things quickly. First, Q4 was a record-breaking quarter and rounded out a really strong fiscal 2018 for us. For the quarter, we achieved 27% year-on-year -- year-over-year revenue growth and 343% year-over-year adjusted EBITDA growth. As we've talked about extensively, the rate we evaluate the progress in our business is on annual basis as that really solves for some of that quarter-to-quarter variability that you see. So more importantly than one quarter's performance is really looking at 2018 overall, and we made great progress. We had a 21% more new homes than in the year prior we sold 29% more products that in the year prior, and we grew our direct-to-consumer revenue by 26% year-over-year. That resulted in 15% year-over-year revenue growth and 24% year-over-year adjusted EBITDA growth. That's our fastest pace of annual revenue growth since fiscal 2014. We had a record number of new homes and we had a record number of existing customers come back and add another Sonos product to their home.

And again, as we've talked about many times, unlike anyone else in our space, that's not replacing an existing product of ours, that's adding another Sonos product to their home. As I often say, the lifetime value of a Sonos customer is only limited to the ideas we come up with over the long term, as our customers continue to show their propensity to add more and more Sonos to their home over time. Sonos isn't a product, it's a system.

Secondly, Beam has been our most successful product launch to date. I'm so proud and thankful of the progress and learning the team is illustrating in making each new product and really each new launch better than the last. Beam has and continues to exceed our expectations. In just a few short months, Beam rocketed to the top of the charts, earning the #1 position in dollar share in the U.S. soundbar category. That's unheard of for a $400 product. It's proof that our approach to building products that are meant to last, look and sound great and are easy-to-use continues to resonate with customers. Perhaps, even more impressively, Playbar, a product we launched more than 5 years ago at this point, still holds the #3 spot in terms of dollar share in the U.S. This is convincing evidence that our product portfolio holds its value over time, a fact that really sets Sonos apart from other companies in this space.

And finally, I think all this momentum puts us in an excellent position for fiscal 2019, which will really be a year of both product and business innovation. Given our momentum coming out of fiscal '18, the impressive start for Beam and the continued performance of our broader portfolio, we are well positioned. We have many promising initiatives in the pipeline that point to a Sonos future that we're all very excited about. Our partnership with Ikea is a notable one. For the first time, we'll deliver an amazing sound experience without producing 100% of the hardware ourselves. It's a demonstration of the flexibility and potential of the Sonos platform, an opportunity to really reimagine sound in the home with one of the world's leaders in decor and design. Another example is Google Assistant, which will be welcoming to the Sonos platform alongside the Amazon Alexa in 2019. I actually have it running in my home, and it's fantastic. Our ambition is to be the world's leading sound experience company. While we continue to innovate great listening experiences for the home, we'll expand our focus beyond. Because half of the world's music listening takes place out of the home, and will be a unique opportunity to really bring the magical Sonos experiences to spaces and places that matter to listeners.

With that, I'd like to pass it to Mike for a few comments on our fiscal '19 outlook.

Thanks, Patrick. Good afternoon, everyone. Before we open up the call for questions, I want to share our financial outlook for fiscal 2019, as described in our shareholder letter we issued earlier today.

To provide better visibility for investors, we are providing full year 2019 guidance as well as the first quarter, which ends in December. Our outlook highlights revenue and adjusted EBITDA growth ranges as these are the metrics we focused on to deliver sustainable profitable growth. As a reminder, our long-term financial targets are to grow revenue by greater than 10% year-after-year, while growing adjusted EBITDA by at least 20%. So for the full fiscal year ending September 2019, we expect annual revenue in the range of $1.25 billion to $1.275 billion or 10% to 12% year-over-year growth. For the full fiscal year, we expect annual adjusted EBITDA in the range of $83 million to $88 million or 20% to 27% year-over-year growth. In short term, for the -- for our Q1, which we're currently in, which ends this December 29, we expect revenue in the range of $485 million to $495 million, 3% to 6% year-over-year growth. And for our Q1, our expected -- we expect adjusted EBITDA in the range of $66 million to $69 million or 1% to 6% growth year-over-year.

With that, we'll open it up for questions.

(Operator Instructions) Your first question is from Rod Hall with Goldman Sachs.

So I wanted to start off, I guess, and ask a little bit about Beam linearity to the quarter. I'm assuming that, you would expect most of the Beam demand to come right at the tail-end of December, but I just want to check that because we haven't had a lot of experience with your seasonal linearity yet? And then, I also had a question on China tariffs. I know that you guys manufacture a lot in China, and I wonder if you could just comment on what, if any, tariff impact you have. Have you contemplated moving out of China, et cetera?

Rod, this is Mike. I'll take the first one on Beam in terms of how it flowed through the quarter. We launched it mid-July. It start out quite strong and continued, quite honestly, throughout the quarter. August is generally a slower month for consumer electronics, including ourselves, but it continues to sell well through August, and we saw it pick up nicely in September. So we saw a strong sell-through to end consumers through the end of the quarter and continue to see reorders from a sell-in perspective from our partners. So pretty strong throughout the quarter.

And Mike, could I -- maybe -- I'm sorry, I just wanted to say -- maybe a follow-up on that, could you just say, kind of, what your visibility looks like this quarter? Do you think that -- is your experience by now you've got pretty good predictive capability for the demand as we move through the last few weeks of the quarter here? Or just kind of give us some idea on that?

Yes. In term of visibility, I mean, we have visibility into usual metrics we look at, which is sell-in, consumer and registrations. So we have good visibility through yesterday. We all know that the biggest part of the quarter -- for this quarter, starts to really ramp up starting next week, with Black Friday and for the rest of -- through December. So we have good visibility. Things are looking good, which is reflected in our guidance. But still quite -- the holiday spike is still to come.

Yes, Rod, it's Patrick. One thing I would just add on to that is I think we did a good job as well of exiting the quarter in a healthy inventory position in terms of a new product not ending with too much inventory in the channel, so a pretty healthy position to be. So Beam is in a good place from that. And that' what I mean, about learnings from each launch because we executed on that better than we did with the One earlier in the year. On tariffs, definitely something we've been thinking about. Our core products are not currently impacted by the existing tariffs that are in place, just so everybody is on same page. We do have a few accessories that have been impacted, but that impact is immaterial at this point. I would stress that we definitely do not believe that tariffs are a sound long-term economic policy and we've been active to try and make sure our views are well-known. That said, we've been evaluating ways to mitigate any short-term impacts to the tariffs. So we've been thinking about whether we would do something on the price front, if we had to. It's obviously an industry-wide issue, but I think, given where we are positioned in our premium positioning, we're in a better spot to actually be able to weather anything like that. And then, on the supply side, Dave and the team have been very working very closely with our manufacturing partners to look at options there and make sure that we can figure out a way to ultimately be able to mitigate those as best as possible. So we've got, kind of, efforts on both fronts to make sure that these don't disrupt our long-term plans, and I'm very confident that even if they were to come in place, it might have a short-term impact, but won't knock us off our long-term trajectory.

Your next question is from Katy Huberty with Morgan Stanley.

You addressed some of this in your shareholder letter, but can you just talk broadly how you're planning to approach the holiday season this year? Last year, competitors led with very low prices. And just wondering, how you can differentiate in ways other than prices as we come up on the holiday season? And then, I have a follow-up.

Yes, sure, Katy, it's Patrick. I'll take that one. So I think 2018, if you think about the balance of 2018 and where we landed, there's never been -- obviously, we executed very well on launching 2 new products, we have a strong portfolio, a strong brand, but also there's never been more activity and really attention in this space. And to your point, a lot of it's been at sub-$100 price points. And we've obviously, seen even in Q4, right, a lot of activity on that front. And so our performance and our ability to accelerate both new homes and the number of people that are coming back to buy another Sonos product in existing homes leads me to believe that our view that people will migrate upwards as they get a taste of smart speakers and like -- we kind of ride this wave that's happening now around streaming music and all the activity that's happening, is working. Because we've just seen such a great acceleration. And I don't see anything right now, from this quarter or from our experience in the previous quarter that lead me to believe that consumers aren't going to long-term look for a better experience in our product that lasts. And so we're comfortable with where we are right now. You won't see us get overly aggressive. We did have some promotions focused on One and Beam primarily, in the holidays that you will see and are actually public now. But for the most part, that's not something we're relying as much and I think the strength of the portfolio will see itself through. But you will see a little of that. You will see us more active in terms of marketing, for sure. But we've learned a lot on that front, and it will be effective digital marketing and you've also seen us drive leverage in that area. And we're going to continue to.

Okay. And then, you mentioned Sonos outside the home. How would you compare that addressable market to the Sonos' home market? And is there anything baked into fiscal '19 guidance around outside the home? I know you've talked about Ikea and some other product launches that may be baked into the numbers that is outside the home in there too?

Yes, Katy, it's Patrick, again. We don't have anything baked into the fiscal 2019 plan, as it relates to outside the home at this point. But we're working -- we have a 3-year road map, and we have several products that take us outside the home there, and we do plan to deliver the first one within the next 12 months. So we're thinking step-by-step. I think the opportunity -- we often talk about the 175 million people that are praying for stream music going to 300 million. I think it's that same group of people, if you will, and so still contrast that to where we are today in terms of the number of homes we have in sub-10 million. So it's a way to get into more of those people's lives, quite frankly, and so there's kind of 2 elements. One is, how do we keep driving that good momentum with the new homes and the new people that are coming into our ecosystem, and so I think some of the new products will help us reach people in a different way. And at the same time, I think the other really compelling thing is that we know the people that are part of our existing home-based today will buy any of the new products we come out with. Obviously, for competitive reasons, I want to be pretty mindful of where exactly we're going, but it's not too hard to figure out the other areas as we inspired to really be the leading sound experience company out there.

Your next question is from Brian Fitzgerald with Jefferies.

You've highlighted the opportunity to increase your direct-to-consumer marketing and really leverage the marketing expense line. And Patrick earlier, you specifically mentioned, digital marketing heading into the fourth quarter and you're clearly executing there, direct-to-consumer growing 26% year-over-year. So wanted to know if you could unpack that a bit more and highlight any areas of particular strength or momentum? How quickly are those initiatives scaling in your regard? And maybe, any formats or channels that are yielding the best ROIs for you?

Yes, I'll take that one. So it's been a year of learning. As we've gone through that, you've seen the progress and the fact that it's grown faster than any of our other channels. Part of that is the fact that we have a strong base of existing customers that we can tap into and have a good relationship with. And so I think that puts us at an advantage, quite frankly. So that's one area. For instance, as we introduced Beam, we made that available specifically on sonos.com for a short period of time before opening that up. And as we've been clear about that is our best channel, I think, for both education and being able to clearly get our message out and also from a margin perspective as we look at it. That said, the teams have been doing some fantastic jobs really trying to explore some new areas. So I think last time I probably talked about Ron Johnson's company Enjoy. And that's been growing and exciting. But as well, with Costco in the United States, some work that we've been doing has yielded some great results. And so that's great as we look at it. We've been doing some good stuff with Best Buy. And so like all of our channels, I would say, we're pretty happy with at this point. I think one thing I've mentioned in the past is, we are very careful about where we get distributed, and you see that in the way we ventured Japan for instance. And so I think we're in good shape distribution-wise. We continue to look at where our audience is shopping and make sure that we're in all the places that they want to be. It's one of the reasons that led us to Costco and also to the work with Ikea, because I think that's going to be another one that holds a lot of promise for fiscal '19. But I'm also confident, based on our plans, that we'll be able to grow direct-to-consumer in a faster pace than the rest of our business. So that's an area you're going to continue to see us invest more. And just try -- we've just gotten better over the last year. I've seen what works into A/B testing and the team's really stepped up on that front. So I'm pretty bullish about our DTC.

Your next question is from Adam Tindle with Raymond James.

I just, kind of, want to continue on that subject. You're obviously generating leverage from controlling sales and marketing expense, but it doesn't seem to be coming with degradation in revenue growth rates, resulting in achievement of your focus on profitable growth. So maybe Patrick, if you can talk about this balance and what's enabling these 2 areas, which are kind of typically offsetting levers? Why doesn't that impact future revenue growth rates because that's obviously not implied in your guidance? Just what gives you the confidence on that?

I think our ability -- really we've gotten much more homed in on like where our spend happens and how it impacts what our customers do. And one of the things we've learned through this too is how powerful the evangelism of our products are. And so we know a lot of our customers learn about Sonos from other people that have Sonos, and are telling them about it and encouraging them to have it as we go through it. So we've kind of been doubling down on how we're able to do that and using that. And the -- really the other lever, I would say, is using our earned media efforts this year. I think the benefit, Adam, is that with getting on the 2 products to your cadence allows us to drive a lot more earned media and allows us to get our message out there, if you will, and be at the forefront without having to invest necessarily as much in the sales and marketing line to some degree. And so obviously, we also have moved from some expensive means of advertising that we've done in the past around TV and media and so -- and moved more to the digital online side of it, and we're just getting a lot better as we've been able to do that, and we believe that we have more opportunity there and that ultimately, building these great products and providing consumers these great experiences, especially, in a market where there's a lot of energy from other companies that are attracting people into the smart speaker space, and then, always looking at us as the leader, it actually adds up to a pretty good situation for us where we can ride the wave of what's happening both from others' investments in this space and from what's happening on the streaming music side of the equation plus our customer evangelism, plus our leverage from doing a lot more digital investments than traditional media. I think all adds up to the kind of leverage you're seeing in our model. And I feel for the long term the kind of investments we've talked about for sales and marketing should keep us in a strong brand position.

Okay. Makes sense. And just maybe a quick follow-up, maybe for Mike on the fiscal '19 adjusted EBITDA guidance. Looks like it implies that leverage is accelerating throughout the year. I think you've got, kind of, low to mid-single-digit growth in Q1 but over 20% growth for the full fiscal year. So could you just talk about the assumptions underlying this? Is it MLCCs getting better, are there additional cost savings to be recognized? What are the buckets that lead to the linearity in the year?

Sure. So in terms of just you specifically called out MLCC, which is basically the shortage that everyone has been seeing in the industry in terms of these electronic parts. We have been working on it quite closely, feel real good about the supply. We have the supply we need to meet the demand. And from a premium price standpoint, things have gotten better, which we'll see throughout the year. I wouldn't say unless it gets better as we go on that, Adam, but we are in a better spot than we were, which is a good thing. In terms of the shape of the year, in '18, you kind of saw what happened in terms of growth, kind of bookends, very high growth Q1 last year, and we just finished obviously with 27% growth in this quarter. In '19, and you can see the guidance for Q1, but you'll see that the growth is going to look a little different, more lower on -- in the beginning in Q1 and on the back-end, and higher growth in the middle in Q2 and Q3. So you'll see that flow through into the EBITDA as well. We still will have a bit of a front end in terms of EBITDA as we do reach Q1, which is our highest-volume quarter. So that's kind of the way we would see the year kind of flowing from a shape standpoint and specifically on MLCC, still there, still a challenge but we've been able to knock it down a bit.

Okay. Just one quick little clarification on Q1. You talked about the gross margin being lower than the fiscal year range. I know that's typical seasonal. But could you give us a sense of magnitude? Is it more than the previous couple of years or is it like 500 to 600 basis points decline sequentially? Or I guess, why are you calling that out specifically, is it just to get our models ready for normal seasonality or is that going to be more than that?

Yes, no, when we gave the guidance for the year of 40% to 41%, you'll see each -- if you look back in our history, whether it's '18 or before, Q1 will be our lowest gross margin quarter and it really is impacted by the seasonal promotional activity. So it's no more than that. I would expect it to be below that range of 40% to 41% nothing really different this year than prior years. It's really about -- it's the holiday season, it's promotional activity, it's going to start next week, it's actually our offers are already out there as far as Black Friday and Cyber Monday. So that's really -- it's the usual seasonal promotional activity that we see.

Your next question is from Matt Sheerin with Stifel.

I wanted to just ask, concerning the product categories, specifically, the wireless speakers where you're going to be running into some tough comps. I know, last year you had a very, very strong quarter with the new product, and here you are anniversarying that. So could you give us sort of expectations? It looks like you may be actually down in wireless speakers year-over-year as you start and play through the year. And I know, there's plans to come out with some new devices later in fiscal year, but could you just talk about what we're thinking in terms of mix there and expectations for growth in that sector?

Sure, Matt, it's Mike again. I'm not going to give any specific guidance by category, but just to give you a little color. So Q1 '18, we had a very strong growth 26% that quarter and that was the first quarter Sonos One. So real strong year. So year-over-year, yes that's a bit of a tough comp. That was when we launched Sonos One, we had big holiday period. So that's a tough comp. And that's -- of course, that's factored into our guidance for Q1. Now when you look at the wireless -- when you look at the home theater category, there we have been, which just came on in July, which has done quite well. And we expect that to be a significant growth driver in Q1 and for the rest of the year. So home theater will -- we expect home theater to do quite well. In terms of other products that we already announced, we have the Sonos Amp, which will be in the component -- our component category, which is launching on a limited basis this quarter and then full launch in our Q2. So that's an area in terms of category standpoint, that has been recently either flat or down. We really expect to see that product rejuvenate that category. Early reviews and acceptance, it looks very exciting, but we expect that to pick up nicely. As far as, we have Ikea coming out later in the year as well, which will also be driving growth. But I think that's the color I can give you at this point, it should be a strong year for Beam with home theater and then we have the Amp coming out as well.

Okay. And then Patrick, as we look to the holiday season, we're seeing a lot of devices, low-priced devices from the big competitors particularly, video-based devices. Do you consider that category competition where at some point, you're going to have to come out with display-based devices? Or is that just sort of a different category given the quality of those products?

Yes, we're watching that category, I'd say, Matt. It actually started last year when the Amazon introduced the Echo Show, as well at this point, I don't see our customers being very focused on it. There's -- if we go back again to the strategic intent of all the companies that are jumping into this space I would say, I think smart displays certainly make it easier for companies to serve ads if that's their main strategic intent or offer up a list of products free to go through and shop, but from an overall sound experience, I don't -- so far, I don't -- a lot of our customers aren't asking for another screen in their kitchen or the bedroom or these other areas. And so I think it remains to be seen how the smart display category will really play out. We'll keep watching it but at this point, I haven't seen it yet really gaining much traction from my perspective.

(Operator Instructions) This concludes the Q&A portion of the call. I'd now like to turn it back over to Patrick Spence for any closing remarks.

All right, thanks. And thanks again to everybody for attending and for the questions. 2018 was a great year for us, 2 new products, our fastest pace of revenue growth since fiscal 2014, the acceleration on our pace of new homes to a record number and also a record number of existing customers coming back and adding another Sonos product to their home. This sets us up well for a strong fiscal '19 with our eye on both product and business innovation this year. As we stretch beyond where we've traditionally played and look to become the world's leading sound experience company. I would like to take a minute to thank the team for an amazing job in 2018. I couldn't be more honored or proud or thankful to be part of the amazing team at Sonos. And we have a great future ahead.

Finally, I hope everybody takes time to enjoy the playlist we included in this quarter's shareholder letter that Mike referenced. And I'd just add one more for my personal playlist and that's Mick Jenkins who just released a new album called Pieces of a Man. You might recall, Mick had a really powerful song and video called Drowning, back in 2016. And thanks to my friend Kenny MacPherson at Big Deal Music for putting me onto Mick's latest album. Operator, that's a wrap.

This concludes today's conference call. You may now disconnect.