Sonos Reports Record Third Quarter Fiscal 2021 Results and Raises Fiscal Year 2021 Outlook

SANTA BARBARA, Calif.--(BUSINESS WIRE)--Sonos, Inc. (Nasdaq: SONO) today reported record third quarter fiscal 2021 results.

Third Quarter 2021 Financial Highlights (unaudited)

• GAAP net income (loss) increased to $17.8 million from ($57.0) million last year; non-GAAP net income (loss) excluding stock-based compensation, restructuring and legal and transaction related fees increased to $38.7 million from ($11.6) million last year.
• GAAP diluted earnings per share (EPS) increased to $0.12 from ($0.52) last year; non-GAAP diluted earnings per share (EPS) excluding stock-based compensation, restructuring, and legal and transaction related fees increased to $0.27 from ($0.11) last year.
• Adjusted EBITDA increased to $46.7 million from ($2.7) million last year.
• Adjusted EBITDA margin increased to 12.3% from (1.1%) last year.
• Gross margin increased 300 basis points to 47.0% from 44.0% last year.
• Revenue increased 52% year-over-year to $378.7 million; on a constant-currency basis, revenue increased approximately 45% year-over-year.

Sonos CEO Patrick Spence commented, “Our third quarter results represent yet another record-shattering quarter at Sonos. We believe that the strong demand for our products is unwavering and underscores the uniqueness and power of our business model where customers start with one product and expand with more over time. Based on the strong demand for our products, the amazing execution of our team, and the power and profitability of our business, we are yet again raising our outlook for fiscal 2021.”

Mr. Spence continued, “Our future has never been brighter, as there are three macro trends that position Sonos for continued growth in the large and growing global audio market. First, the 'Golden Age of Audio' - as the leading premium home audio brand, we are well positioned to capitalize on the continued increase in audio content consumption and new audio formats that are emerging. Second, 'Hollywood at Home' - with more video content going direct-to-home, consumers are demanding a theater-like audio experience in the home which Sonos is well positioned to provide. Third, 'The Great Reshuffling' - the untethering of people from their offices enabling flexibility on how and where to live will drive continued investment in the home, a trend that our premium brand, design and quality is well-suited to capitalize on.”

Mr. Spence concluded, “Long-term, we remain focused on our key three strategic initiatives - the expansion of our brand, the expansion of our offerings, and driving operational excellence. The powerful momentum we are experiencing in our business, exceeding even our own expectations from six months ago, puts us ahead of schedule on reaching our fiscal 2024 financial targets. We are extremely well positioned for the long-term and expect to deliver significant free cash flow and increased shareholder value over time as we continue on our quest to be the world’s leading sound experience company.”

Fiscal 2021 Outlook

• Revenue increased to a range of $1.695 billion to $1.710 billion, representing growth in the range of 28% to 29% year-over-year (30% to 31% on a comparable basis excluding the 53rd week in fiscal 2020).
  • This compares to our prior guidance range of $1.625 billion to $1.675 billion and our initial fiscal 2021 outlook provided at the start of the fiscal year of $1.44 billion to $1.5 billion.
• Adjusted EBITDA increased to a range of $270 million to $280 million representing growth in the range of 149% to 158%.
  • This compares to our prior outlook of $225 million to $250 million and our initial fiscal 2021 outlook of $170 million to $205 million.
• Adjusted EBITDA margin increased to a range of 15.9% to 16.4%, representing a 770 to 820 basis point improvement year-over-year.
  • This compares to our prior outlook range of 13.8% to 14.9% and our initial fiscal 2021 outlook of 12% to 14%.
• Gross margin increased to a range of 46.5% to 46.9%, representing a 340 to 380 basis point improvement year-over-year.
  • This compares to our prior guidance range of 46.0% to 46.5% and our initial fiscal 2021 outlook of 45.3% to 45.8%.
  • Our fiscal 2021 gross margin outlook includes tariff refunds of $11 million and tariff expense of $9 million recognized through the third quarter fiscal 2021. Minimal tariff expense and no further tariff refunds are assumed for the fourth quarter given timing uncertainty.

Supplemental Earnings Presentation

The Company has posted a supplemental earnings presentation accompanying its third quarter fiscal 2021 results to the Earnings Reports section of its investor relations website at https://investors.sonos.com/reports-and-filings/default.aspx#section=earningsreports.

Conference Call, Webcast and Transcript

The Company will host a webcast of its conference call and Q&A related to its third quarter fiscal 2021 results on August 11, 2021 at 5:00 p.m. Eastern Time (2:00 p.m. Pacific Time). Participants may access the live webcast in listen-only mode on the Sonos investor relations website at https://investors.sonos.com/news-and-events/default.aspx. The conference call may also be accessed by dialing [phone] with conference ID 8063688. Participants outside the U.S. can access the call by dialing [phone] using the same conference ID.

An archived webcast of the conference call and a transcript of the company’s prepared remarks and Q&A session will also be available at https://investors.sonos.com/reports-and-filings/default.aspx#section=earningsreports following the call.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(unaudited, in thousands, except share and per share amounts)
	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
Cost of revenue		200,811			139,519			714,142			576,071
Gross profit		177,861			109,791			643,062			410,420
Operating expenses
Research and development		55,578			57,770			164,294			159,890
Sales and marketing		67,231			77,273			198,888			205,201
General and administrative		38,323			31,662			113,372			87,989
Total operating expenses		161,132			166,705			476,554			453,080
Operating income (loss)		16,729			(56,914	)		166,508			(42,660	)
Other income (expense), net
Interest income		34			81			114			1,954
Interest expense		(77	)		(360	)		(525	)		(1,187	)
Other income, net		1,998			365			4,678			3,366
Total other income, net		1,955			86			4,267			4,133
Income (loss) before provision for (benefit from) income taxes		18,684			(56,828	)		170,775			(38,527	)
Provision for (benefit from) income taxes		858			152			3,436			(1	)
Net income (loss)	$	17,826		$	(56,980	)	$	167,339		$	(38,526	)
Net income (loss) attributable to common stockholders:
Basic	$	17,826		$	(56,980	)	$	167,339		$	(38,526	)
Diluted	$	17,826		$	(56,980	)	$	167,339		$	(38,526	)
Net income (loss) per share attributable to common stockholders:
Basic	$	0.14		$	(0.52	)	$	1.38		$	(0.35	)
Diluted	$	0.12		$	(0.52	)	$	1.20		$	(0.35	)
Weighted-average shares used in computing net income (loss) per share attributable to common stockholders:
Basic		125,138,279			109,477,622			120,876,472			109,325,785
Diluted		144,181,632			109,477,622			139,293,775			109,325,785
Total comprehensive income (loss)
Net income (loss)	$	17,826		$	(56,980	)	$	167,339		$	(38,526	)
Change in foreign currency translation adjustment		(784	)		219			262			(731	)
Comprehensive income (loss)	$	17,042		$	(56,761	)	$	167,601		$	(39,257	)

Condensed Consolidated Balance Sheets
(unaudited, dollars in thousands, except par values)
	As of
	July 3, 2021			October 3, 2020
Assets
Current assets:
Cash and cash equivalents	$	670,905		$	407,100
Restricted cash		-			191
Accounts receivable, net of allowances		70,329			54,935
Inventories		146,697			180,830
Prepaids and other current assets		23,763			17,321
Total current assets		911,694			660,377
Property and equipment, net		71,732			60,784
Operating lease right-of-use assets		36,595			42,342
Goodwill		15,545			15,545
Intangible assets, net		24,962			26,394
Deferred tax assets		1,747			1,800
Other noncurrent assets		21,823			8,809
Total assets	$	1,084,098		$	816,051
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	198,495		$	250,328
Accrued expenses		77,006			45,049
Accrued compensation		66,041			44,517
Short-term debt		-			6,667
Deferred revenue, current		16,906			15,304
Other current liabilities		42,471			31,150
Total current liabilities		400,919			393,015
Operating lease liabilities, noncurrent		36,501			50,360
Long-term debt		-			18,251
Deferred revenue, noncurrent		53,480			47,085
Deferred tax liabilities		2,394			2,434
Other noncurrent liabilities		3,677			7,067
Total liabilities		496,971			518,212
Stockholders’ equity:
Common stock, $0.001 par value		128			114
Treasury stock		(48,740	)		(20,886	)
Additional paid-in capital		698,520			548,993
Accumulated deficit		(61,153	)		(228,492	)
Accumulated other comprehensive loss		(1,628	)		(1,890	)
Total stockholders’ equity		587,127			297,839
Total liabilities and stockholders’ equity	$	1,084,098		$	816,051

Condensed Consolidated Statements of Cash Flows
(unaudited, dollars in thousands)
	Nine Months Ended
	July 3, 2021			June 27, 2020
Cash flows from operating activities
Net income (loss)	$	167,339		$	(38,526	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization		25,789			27,692
Impairment and abandonment charges		2,789			14,047
Stock-based compensation expense		46,755			41,638
Other		1,253			4,371
Deferred income taxes		95			(176	)
Foreign currency transaction gain		(2,226	)		(1,491	)
Changes in operating assets and liabilities:
Accounts receivable, net		(13,846	)		53,418
Inventories		32,333			129,623
Other assets		(17,730	)		(4,400	)
Accounts payable and accrued expenses		(27,169	)		(162,137	)
Accrued compensation		21,501			8,038
Deferred revenue		7,715			3,506
Other liabilities		2,143			7,548
Net cash provided by operating activities		246,741			83,151
Cash flows from investing activities
Purchases of property and equipment, intangible and other assets		(34,792	)		(29,905	)
Cash paid for acquisition, net of acquired cash		-			(36,289	)
Net cash used in investing activities		(34,792	)		(66,194	)
Cash flows from financing activities
Repayments of borrowings		(25,000	)		(5,000	)
Payments for repurchase of common stock		(21,729	)		(33,216	)
Proceeds from exercise of common stock options		131,536			17,708
Payments for repurchase of common stock related to shares withheld for tax in connection with vesting of restricted stock units		(34,877	)		(6,603	)
Net cash provided by (used in) financing activities		49,930			(27,111	)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		1,735			639
Net increase (decrease) in cash, cash equivalents and restricted cash		263,614			(9,515	)
Cash, cash equivalents and restricted cash
Beginning of period		407,291			338,820
End of period	$	670,905		$	329,305
Supplemental disclosure
Cash paid for interest	$	434		$	1,318
Cash paid for taxes, net of refunds	$	3,773		$	1,153
Cash paid for amounts included in the measurement of lease liabilities	$	15,078		$	11,689
Supplemental disclosure of non-cash investing and financing activities
Purchases of property and equipment in accounts payable and accrued expenses	$	9,046		$	3,055
Right-of-use assets obtained in exchange for new operating lease liabilities	$	1,622		$	75,913

Reconciliation of Net Income (Loss) to Adjusted EBITDA
(unaudited, dollars in thousands)
	Three Months Ended						Nine Months Ended
	July 3, 2021			June 27, 2020			July 3, 2021			June 27, 2020
Net 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) expense, 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	%

(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 plan. The gain represents the difference between the related operating lease liability and previously accrued restructuring expenses versus the early termination payment. For a description of the 2020 restructuring plan, see “Restructuring and Related Costs” below.

(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.

Reconciliation of Cash Flows Provided by Operating Activities to Free Cash Flow
(unaudited, dollars in thousands)
	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, intangible and other assets		(34,792	)		(29,905	)
Free cash flow	$	211,949		$	53,246

Revenue by Product Category
(unaudited, dollars in thousands)
	Three Months Ended				Nine Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Sonos speakers	$	310,233	$	196,895	$	1,105,283	$	779,939
Sonos system products		47,621		42,164		197,442		150,887
Partner products and other revenue		20,818		10,251		54,479		55,665
Total revenue	$	378,672	$	249,310	$	1,357,204	$	986,491
Revenue by Geographical Region
(unaudited, dollars in thousands)
	Three Months Ended				Nine Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Americas	$	223,720	$	151,167	$	784,898	$	556,325
Europe, Middle East and Africa ("EMEA")		126,228		83,818		480,541		353,807
Asia Pacific ("APAC")		28,724		14,325		91,765		76,359
Total revenue	$	378,672	$	249,310	$	1,357,204	$	986,491

Stock-based Compensation
(unaudited, dollars in thousands)
	Three Months Ended				Nine Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Cost of revenue	$	248	$	306	$	723	$	866
Research and development		6,125		6,154		19,067		16,697
Sales and marketing		3,277		3,710		10,317		10,658
General and administrative		5,897		4,871		16,648		13,417
Total stock-based compensation expense	$	15,547	$	15,041	$	46,755	$	41,638

Restructuring and Related Costs ^(1)
(unaudited, dollars in thousands)
	Three Months Ended				Nine Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021			June 27, 2020
Research and development	$	-	$	4,949	$	25		$	4,949
Sales and marketing		-		19,788		(2,636	)		19,788
General and administrative	$	-	$	1,423	$	-		$	1,423
Total restructuring and related costs	$	-	$	26,160	$	(2,611	)	$	26,160

(1) On June 23, 2020, we initiated a restructuring plan as part of our efforts to reduce operating expenses and preserve liquidity due to the uncertainty and challenges stemming from the COVID-19 pandemic. As part of the 2020 restructuring plan, we eliminated approximately 12% of our global headcount and closed our New York retail store and six satellite offices. We believe these initiatives will better align our resources to provide further operating flexibility and more efficiently position our business for our long-term strategy. Activities under the 2020 restructuring plan were substantially completed in the first quarter of fiscal 2021. In the first quarter of fiscal 2021, we negotiated the early termination of a facility lease that was part of the 2020 restructuring and recorded a gain of $2.8 million, representing the difference between the related operating lease liability and previously accrued restructuring expenses versus the early termination payment. The gain was recognized as a credit in sales and marketing expenses on the condensed consolidated statements of operations and comprehensive income.

Use of Non-GAAP Measures

We have provided in this press release financial information that has not been prepared in accordance with generally accepted accounting principles (“U.S. GAAP”), including adjusted EBITDA, adjusted EBITDA margin, free cash flow, net income (loss) excluding stock-based compensation, restructuring, and legal and transaction related fees, and diluted earnings per share (EPS) excluding stock-based compensation, restructuring, and legal and transaction related fees. 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 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. Investors are encouraged to review the reconciliation of these financial measures to their nearest U.S. GAAP financial equivalents provided in the financial statement tables above. 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 define free cash flow as net cash from operations less purchases of property and equipment and intangible assets. We calculate non-GAAP net income (loss) excluding stock-based compensation, restructuring and legal and transaction related fees as net income (loss) less stock-based compensation, restructuring fees and legal and transaction related fees. We calculate non-GAAP diluted earnings per share (EPS) excluding stock-based compensation, restructuring, and legal and transaction related fees as net income (loss) less stock-based compensation, restructuring costs and legal and transaction related fees divided by our number of shares at fiscal year end. We calculate constant currency growth percentages by translating our prior period financial results using the current period average currency exchange rates and comparing these amounts to our current period reported results. 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 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.

Forward Looking Statements

This press release contains forward-looking statements that involve risks and uncertainties. These forward-looking statements include statements regarding our outlook for the fiscal year ended 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, 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 our 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 press release, and we undertake no obligation, and expressly disclaim any obligation, to update forward-looking statements herein in light of new information or future events. Sonos and Sonos product names are trademarks or registered trademarks of Sonos, Inc. All other product names and services may be trademarks or service marks of their respective owners.

About Sonos

Sonos (Nasdaq: SONO) is one of the world’s leading sound experience brands. As the inventor of multi-room wireless home audio, Sonos’ innovation helps the world listen better by giving people access to the content they love and allowing them to control it however they choose. Known for delivering an unparalleled sound experience, thoughtful home design aesthetic, simplicity of use and an open platform, Sonos makes the breadth of audio content available to anyone. Sonos is headquartered in Santa Barbara, California. Learn more at www.sonos.com.