q3 fy21 financial results august 11, 2021
TRANSCRIPT
Q3 FY21 Financial ResultsAugust 11, 2021
Forward Looking Statements
This presentation contains forward-looking statements that involve risks and uncertainties. These forward-looking statements include statements regarding our outlook for the fiscal year ending October 2, 2021, our fiscal 2024 targets, our long-term focus, financial, growth, and business strategies and opportunities, growth metrics and targets, our business model, new products, services and partnerships, profitability and gross margins, our direct-to-consumer efforts, our market share, our tariff expense, and other factors affecting variability in our financial results.
These forward-looking statements are only predictions and may differ materially from actual results due to a variety of factors, including, but not limited to, the duration and impact of the COVID-19 pandemic and related mitigation efforts on our industry and supply chain; supply chain challenges, including shipping and logistics challenges and significant limits on component supplies; changes in general economic or market conditions that could affect consumer income and overall consumer spending; our ability to successfully introduce new products and services and maintain or expand the success of our existing products; the success of our efforts to expand our direct-to-consumer channel; the success of our financial, growth and business strategies; our ability to meet and accurately forecast product demand and manage any product availability delays; and the other risk factors set forth under the caption “Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended April 3, 2021 and our other filings filed with the Securities and Exchange Commission (the “SEC”), copies of which are available free of charge at the SEC’s website at www.sec.gov or upon request from our investor relations department.
All forward-looking statements herein reflect our opinions only as of the date of this letter, and we undertake no obligation, and expressly disclaim any obligation, to update forward-looking statements herein in light of new information or future events, except to the extent required by law.
Non-GAAP Measures
Additional information relating to certain of our financial measures contained herein, including non-GAAP financial measures, is available in the appendix to this presentation.
● Record Q3 results driven by continued strong demand
● Record Q3 adjusted EBITDA margin of 12.3% driven by strong demand, opex leverage on higher sales, and gross margin expansion
● Record Q3 revenue of $378.7M, +52% from LY driven by strong product demand, annualizing the Y/Y declines in Q3 20 and offset by continued constrained product availability
● Q3 gross margin of 47.0%, +300 bps from LY driven primarily by lower promotional discounts (“At Home with Sonos” promo Q3 20), tariff refunds, fixed cost leverage on higher sales volume and offset by channel mix and higher component and logistics costs related to industry-wide supply chain dynamics
● Significant opex leverage driven by the higher Q3 sales volume vs the prior year quarter
● Increasing our FY21 outlook again
Q3 Highlights
Note: Unaudited. See appendix for reconciliation of GAAP to non-GAAP measures.
Record Q3 Profitability and Strong Revenue Growth
● Revenue +52% due to strong product demand across all categories, annualizing the Y/Y declines in Q3 20 (retail store closures), and offset by continued constrained product availability
● Adjusted EBITDA growth driven by continued strong demand, opex leverage on the higher sales volume, and significant gross margin expansion
● Adjusted EBITDA margin increased to record 12.3%; ex-tariff duties and refunds adjusted EBITDA margin of 12.1%
● Gross margin +300 bps to 47.0%; ex-tariff duties and refunds gross margin of 46.8%
Q3 Revenue
Q3 Adjusted EBITDA
Q319 Q320
$46.7
Q320
Q321
Q319 Q321
$260.1$249.3
$6.8
$378.7
Note: $ in millions, unaudited.See appendix for reconciliation of GAAP to non-GAAP measures. Percentages have been calculated using actual, non-rounded figures and, therefore, may not recalculate precisely.
($2.7)
Strong Gross Margin Expansion
Gross margin +300 bps Y/Y - key drivers:
● Lower promotional discounts (“At Home with Sonos” campaign Q3 LY)
● Fixed cost leverage on higher sales volume● $5.0M tariff refund; $4M tariff expense● Offset by channel mix and increased component
costs as well as ongoing higher industry wide shipping and logistics costs
Q319 Q320 Q321
Gross Margin Gross Margin ex Tariff Duties and Refunds
45.1% 45.1% 44.0%
45.7%
47.0%
Note: Unaudited. See appendix for reconciliation of GAAP to non-GAAP measures. Percentages have been calculated using actual, non-rounded figures and, therefore, may not recalculate precisely.
46.8%
Strong Opex Leverage on Higher Sales, Anniversarying Restructuring LY
● Drove significant opex leverage on the higher sales base and anniversarying restructuring and related charges in the prior year quarter
● Excluding restructuring and related charges LY, year-over-year increases in opex driven by the following factors:
○ R&D +5.2% primarily due to higher personnel expenses and other costs
○ S&M +17.0% primarily due to higher marketing expenses related to new product launches, as well as an increase in revenue-related sales fees
○ G&A ex legal and transaction costs +26.3% due to IT investments and increased bonus and stock comp
Note: $ in millions, unaudited.See appendix for reconciliation of GAAP to non-GAAP measures. Percentages and sums have been calculated using actual, non-rounded figures and, therefore, may not recalculate precisely.
Q321 Q320 Y/Y ChangeResearch and Development (GAAP) $55.6 $57.8 (3.8)%
Restructuring and related charges - 4.9 (100.0)%Adjusted Research and Development (Non-GAAP) $55.6 $52.8 5.2%
% of revenue 14.7% 21.2% (650 bps)
Sales and Marketing (GAAP) $67.2 $77.3 (13.0%)
Restructuring and related charges - 19.8 (100.0)%Adjusted Sales and Marketing (Non-GAAP) $67.2 $57.5 17.0%
% of revenue 17.8% 23.1% (530 bps)
General and Administrative (GAAP) $38.3 $31.7 21.0%
Restructuring and related charges - 1.4 (100.0)%Legal and transaction related costs 5.4 4.1 29.5%
Adjusted General and Administrative (Non-GAAP) $33.0 $26.1 26.3%% of revenue 8.7% 10.5% (180 bps)
Total Operating Expenses (GAAP) $161.1 $166.7 (3.3)%Restructuring and related charges - 26.2 (100.0%)
Legal and transaction related costs 5.4 4.1 29.5%Adjusted Operating Expenses (Non-GAAP) $155.8 $136.4 14.2%
% of revenue 41.1% 54.7% (1,360 bps)
Significant Cash Flow and Strong Balance Sheet
● Cash flow from operations of $246.7M, +197% from LY
● Free cash flow of $211.9M, +298% from LY
● Free cash flow / adjusted EBITDA of 81.1%
● Capex of $34.8M, 2.6% of revenue, largely driven by new product launch investments
● Cash and cash equivalents of $670.9M, no debt
YTD21 YTD20Y/Y
Change
Cash flow from operations $246.7 $83.2 197%
Capital expenditures $34.8 $29.9 16%
Capex % of revenue 2.6% 3.0%
Free cash flow $211.9 $53.2 298%
Free Cash Flow / Adj EBITDA 81.1% 85.7%
Ending cash & cash equivalents $670.9 $329.3 104%
Ending total debt $0 $28.2 NM
Note: $ in millions, unaudited.See appendix for reconciliation of GAAP to non-GAAP measures. Percentages have been calculated using actual, non-rounded figures and, therefore, may not recalculate precisely.
FY21 Outlook
● Delivering innovative new products that both new and existing customers love, e.g., Roam
● Services that enhance and further differentiate the customer experience
● Strengthening our direct-to-consumer efforts
● Supporting our incredible partnerships
● Adjusted EBITDA margin expansion
● Industry-leading gross margins
● Navigating global supply chain and logistics challenges
● Double-digit revenue growth
FY21 Priorities
Raising FY21 Outlook: Continued Strong Demand and Adj. EBITDA Margin Expansion
Note: Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP measures. We do not provide a reconciliation of forward-looking non-GAAP measures to their comparable GAAP financial measures . See “Non-GAAP Measures” for more information.
FY21 Outlook speaks only as of the date of this presentation. See “Forward-Looking Statements” for more information.
FY20 Actuals
Initial FY21 Outlook (provided at 4Q earnings)
Prior FY21 Outlook(provided at 1Q earnings)
Prior FY21 Outlook(provided at 2Q earnings) NEW FY21 OUTLOOK
Adjusted EBITDA $108.5 million $170 - $205 million $195 - $225 million $225 - $250 million $270-$280 million
Adjusted EBITDA Margin 8.2% 12.0%-14.0% 12.8% - 14.3% 13.8% - 14.9% 15.9% - 16.4%
Gross Margin 43.1% 45.3% - 45.8% 46.0% - 46.5% 46.0% - 46.5% 46.5% - 46.9%
Revenue $1.326 billion $1.44 - $1.5 billion $1.525 - $1.575 billion $1.625 - $1.675 billion $1.695 - $1.71 billion
% growth (52 wk vs 52 wk) 3% 11% - 15% 17% - 21% 25% - 29% 30% - 31%
% growth (as reported) 5% 9% - 13% 15% - 19% 23% - 26% 28% - 29%
Other Key Assumptions:
Tariffs$32 million
Minimal tariff expense, no tariff refund assumed
Minimal tariff expense, no tariff refund assumed
Minimal tariff expense, no tariff refund assumed
Minimal tariff expense and no tariff refund
assumed in Q4
Long Term Opportunity
Trends Fueling Our Growth
#1
The Golden Age of Audio
#3
The Great Reshuffling
#2
Hollywood at Home
Our Opportunity: Homes
116MAffluent ($75k+2)
Households
349M Households in Core Markets1
PLUSGeographicExpansion
11M Sonos FY20 Households
Source: Euromonitor CY20201. Core Markets include the United States, Canada, Australia, United Kingdom, Germany, Netherlands, Sweden, Denmark, France, Switzerland, Norway, Belgium, Italy, Austria, Spain, Ireland, Finland and Poland2. Represents disposable income as defined by the OECD
~9%FY20 Penetration of Target $75K+
Households in Core Markets2
$25BGlobal Home
Audio
$89B Global Audio
PLUSAudio content,
services & business
$1.3BSonos FY20 Revenue
$26BGlobal Home Audio Market
Source: Futuresource CY2020, Premium defined as $100+ wireless speakers, $200+ soundbars, $300+ Hi-Fi systems, $250+ in-wall/in-ceiling speakers, $250+ bookshelf speakers (pairs), and all AV receivers, Floor-standing speakers, home theater speakers and home theater in a box products and Hi-Fi separates
72%Premium
Home Audio
~7%
$18BPremium Global
Home Audio
FY20 Penetration of Premium Home Audio Market
Our Opportunity: Revenue
Our Strategic Initiatives
Expand Our Brand
Expand Our Offerings
Drive Operational Excellence
Revenue
$2.25BGross Margin
45-47%Adjusted EBITDA Margin
15-18%
Confidence in Our FY 2024 Financial Targets
Appendix
Non-GAAP Measures
We have provided in this presentation financial information that has not been prepared in accordance with GAAP. 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 in 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. Non-GAAP financial measures should not be considered in isolation of, or as an alternative to, measures prepared in accordance with U.S. GAAP.
We define adjusted EBITDA as net income (loss) adjusted to exclude the impact of depreciation, stock-based compensation expense, interest income, interest expense, other income (expense), income taxes and other items that we do not consider representative of our underlying operating performance. We define adjusted EBITDA margin as adjusted EBITDA divided by revenue. We calculate gross margin excluding the impact of tariff duties and refunds as gross profit dollars removing the impact of tariffs imposed on goods imported to the U.S. from China and any tariffs refunds subject to a tariff refund claim approved by U.S. Customs and Border Protection divided by revenue. We define free cash flow as net cash from operations less purchases of property and equipment. We calculate adjusted EBITDA excluding the impact of tariffs as net income (loss) excluding the impact of tariffs imposed on goods manufactured in China and any tariffs refunds subject to a tariff refund claim approved by U.S. Customs and Border Protection and adjusted to exclude the impact of depreciation, stock-based compensation expense, interest income, interest expense, other income (expense), income taxes and other items that we do not consider representative of our underlying operating performance.
We do not provide a reconciliation of forward-looking non-GAAP financial measures to their comparable GAAP financial measures because we cannot do so without unreasonable effort due to unavailability of information needed to calculate reconciling items and due to the variability, complexity and limited visibility of the adjusting items that would be excluded from the non-GAAP financial measures in future periods. When planning, forecasting and analyzing future periods, we do so primarily on a non-GAAP basis without preparing a GAAP analysis as that would require estimates for certain items such as stock-based compensation, which is inherently difficult to predict with reasonable accuracy. Stock-based compensation expense is difficult to estimate because it depends on our future hiring and retention needs, as well as the future fair market value of our common stock, all of which are difficult to predict and subject to constant change. In addition, for purposes of setting annual guidance, it would be difficult to quantify stock-based compensation expense for the year with reasonable accuracy in the current quarter. As a result, we do not believe that a GAAP reconciliation would provide meaningful supplemental information about our outlook.
Three Months Ended Nine Months Ended
July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020Net income (loss) $17,826 ($56,980) $167,339 ($38,526)
Add (deduct):
Depreciation and amortization 9,065 8,861 25,789 27,692
Stock-based compensation expense 15,547 15,041 46,755 41,638
Interest income (34) (81) (114) (1,954)
Interest expense 77 360 525 1,187
Other income, net (1,998) (365) (4,678) (3,366)
Provision for (benefit from) income taxes 858 152 3,436 (1)
Restructuring and related expenses (1) — 26,160 (2,611) 26,160
Legal and transaction related costs (2) 5,351 4,132 25,030 9,285
Adjusted EBITDA $46,692 $(2,720) $261,471 $62,115
Revenue $378,672 $249,310 $1,357,204 $986,491
Adjusted EBITDA margin 12.3% (1.1)% 19.3% 6.3%
Reconciliation of Net Income (Loss) to Adjusted EBITDA
Note: $ in thousands, unaudited.
(1) Restructuring and related expenses for the nine months ended July 3, 2021 includes a gain of $2.8 million, related to our negotiation for the early termination of a facility lease that was part of the 2020 restructuring. The gain represents the difference between the related operating lease liability and previously accrued restructuring expenses versus the early termination payment.
(2) Legal and transaction related costs consist of expenses related to our intellectual property ("IP") litigation against Alphabet Inc. and Google LLC as well as legal and transaction costs associated with our acquisition activity, which we do not consider representative of our underlying operating performance.
Gross Profit and Margin Excluding the Impact of Tariffs
Three Months Ended Nine Months Ended
July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020
Revenue $378,672 $249,310 $1,357,204 $986,491
Reported gross profit 177,861 109,791 643,062 410,420
Add/deduct:
Tariffs, net of refunds (738) 4,049 (1,860) 29,900
Adjusted gross profit 177,123 113,840 641,202 440,320
Gross margin 47.0% 44.0% 47.4% 41.6%
Adjusted gross margin 46.8% 45.7% 47.2% 44.6%
Note: $ in thousands, unaudited.
Nine Months Ended
July 3, 2021 June 27, 2020
Cash flows provided by operating activities $246,741 $83,151
Less: purchases of property and equipment and intangible assets (34,792) (29,905)
Free cash flow 211,949 53,246
Reconciliation of Cash Flows Provided by Operating Activities to Free Cash Flow
Note: $ in thousands, unaudited.