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Sonos, Inc. (SONO) Q2 2020 Earnings Call Transcript

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SONO earnings call for the period ending March 28, 2020.

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Sonos, Inc. (SONO 3.17%)
Q2 2020 Earnings Call
May 6, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello and welcome. My name is Suzanne and I will be your conference operator today. At this time, I would like to welcome everyone to the Sonos Fiscal Second Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any back noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Cammeron McLaughlin, Vice President, Investor Relations, you may begin your conference.

Cammeron McLaughlin -- Vice President of Investor Relations

Thank you. Good afternoon and welcome to Sonos' second quarter fiscal 2020 earnings conference call. I am Cammeron McLaughlin, and with me today are Sonos' CEO, Patrick Spence and CFO, Brittany Bagley. For those joining the call early, today's hold music comes from the playlist that is included in our shareholder letter, with music from many of the artists that Sonos has worked with thus far in 2020 including those featured on Sonos Radio.

Before I hand the call 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 may also refer to several non-GAAP financial measures, including gross margin and adjusted EBITDA, excluding the impact of tariff, adjusted EBITDA, adjusted EBITDA margin and free cash flow. For complete information regarding our non-GAAP financial information and a reconciliation of those measures, please refer to today's shareholder letter regarding our second quarter fiscal 2020 results posted to the Investor Relations portion of our website. I will now turn the call over to Patrick.

Patrick Spence -- Chief Executive Officer

Thank you. Cammeron and hello everyone. Thank you for joining us today. On behalf of everybody at Sonos, we sincerely hope you're managing your way through these challenging times and our thoughts go out to all those impacted by this global pandemic. Since the pandemic hit, our immediate priorities have been to support our people, serve our customers and ensure we weather the storm and emerge stronger. We transitioned to working from home in mid-March and have quickly seen how resilient, adaptable and agile our people are. Our team has risen to the challenge and maintained an incredible level of productivity and teamwork despite the stresses of stay-at-home orders and life in general. This is evidenced by the fact we launched Sonos Radio on April 21 and are announcing three new products today. We have long instilled a "learn and adjust" culture and that approach is resonating as we creatively and quickly solve for the needs of our customers, colleagues and communities.

As you can see from our Q2 results and the early Q3 trends, we are operating in volatile and unpredictable times. We're confident that we're well positioned for the long term and we will emerge stronger from this crisis, but the short term visibility is challenging, which is why we are withdrawing our prior fiscal 2020 guidance at this time. Our second quarter was challenging, as we experienced a 17% year-over-year decline in revenue. Coming off a strong first quarter, we've been expecting some softness in the second quarter. Q2 is usually the quarter where retail partners rebalance their inventories after the holiday quarter. We typically see few orders early in the quarter and then our partners replenish later in the quarter. This Q2, we saw one of our large U.S. retail partners and our German distributor doing this rebalancing but we did not see the replenishments later in the quarter as the COVID-19 pandemic hit and everyone started to close stores and focus on health and safety. This led to a 23% year-over-year decline in revenue in March, specifically. Despite this, we continued to gain share in the streaming home audio category in the U.S. and U.K. and maintained a leadership position during the quarter, which we attribute to the quality of our products and the strength of our brand.

Our continued focus and investment in our direct-to-consumer efforts paid off as we saw a 32% year-over-year increase in our revenue through direct-to-consumer channels in Q2. In April, the first month of our Q3, direct-to-consumer revenue accelerated to approximately 400% year-over-year growth. Of course, most physical retail locations were closed in April, which made it a challenging sales environment to begin with, but we wanted to help make people's lives a little more joyful while they were spending more time at home. So we threw in our original plans and on April 2 we launched a digital campaign "At Home with Sonos" with some tips on how to get the most out of your Sonos and targeted promotional offers that ran through May 5. The other encouraging data point from April was that Move was one of our top selling products and it did not have a promotional offer associated with it.

This underscores that our products are resonating with consumers and that our brand is premium positioned. Thanks to the success of our direct-to-consumer efforts, we expect that our total revenue in April will decline less than 5% year-over-year. We're pretty pleased with this, given the physical retail is closed for the month. It is hard to know what the next few months will bring, and we don't view either March or April as indicative of our natural run rate, but it illustrates that our products and brand are resonating with consumers during this time.

One of the most illustrative data points on how strong engagement was in April was listening hours. We experienced a 48% year-over-year increase in listening hours in the month of April. We're proud that we've been able to make life at home a little more joyful for the more than 10 million homes that we're in today. Innovation remains the core of Sonos, both in the products we build and the culture that fuels it. We design products and experiences that are easy to use, deliver brilliant sound and give users the freedom of choice when it comes to voice and music services.

Today, we are excited to announce the launch of Sonos Arc, Five and Sub. Arc is our premium smart soundbar that brings immersive cinema-quality sound to your home with features like support for Dolby Atmos. Following the many years of success with our Playbar and category leadership, we are thrilled to bring a new premium soundbar to market. This is our best soundbar yet and really epitomizes what we're all about. It's the choice for anyone who loves movies and music. The Five is our most powerful speaker delivering the same studio-quality sound as the beloved Play 5 and bringing increased memory, processing power and a new wireless radio. It also features a stunning new front grille. Our new Sub features the same iconic design and bold bass as its predecessor, but upgrades it with increased memory, processing power and more. Arc, Five and Sub will be available this June.

We continue to explore the role services play in the future of Sonos and continue to experiment with new business models like we have done in the past with Flex and Sonos for Business. We also continue to see long term opportunities to expand upon our partnership model and remain pleased with our partnerships with IKEA and Sonance. As you saw in late April, we launched Sonos Radio. We have seen that our consumers are spending nearly half of our listening time on Sonos listening to radio content. Inspired by, and built for Sonos owners, Sonos Radio is a free ad-supported radio service available in the Sonos app, streaming music, news, sports and original Sonos programming. Sonos Radio integrates a growing list of 60,000 radio stations into one place. Since launch, a significant number of Sonos households have listened to Sonos Radio and has quickly risen up the ranks and become the sixth most used service on the Sonos platform.

While the short term is unpredictable, I'm confident that we're well positioned for the long term and we will emerge from this crisis well positioned to drive sustainable profitable growth. I will now turn the call over to Brittany.

Brittany Bagley -- Chief Financial Officer

Thank you, Patrick. As we have discussed over the last few quarters, Sonos has been focused on balancing strong top-line growth and increasing profitability with the need to continue to invest in our business and future products. Despite the significant challenges this quarter and the potential long term impacts from the global pandemic, that is still our priority. Because of that sustainable profitable growth, we continue to be in a position of strength today where we can focus on what is best for the long term business in addition to taking the necessary short term actions. We also believe that a prudent balance sheet along with M&A and share repurchases is the right capital allocation strategy and today that philosophy is serving us well.

We ended the second quarter with $283 million in cash and cash equivalents and very minimal long term debt. We also have in place an $80 million undrawn revolver providing even further flexibility. We have run a variety of scenarios, as you can imagine, and are confident in our cash position even if a weak economic condition persists. During the second quarter, we used $83.5 million in cash from operations, largely due to the timing of inventory payables following our holiday quarter. Q2 is typically a seasonal low quarter for cash. As we look at the rest of the year, we continue to focus on managing our cash and preserving our strong balance sheet. We also repurchased approximately $30 million of our stock early in the quarter. We currently have approximately $17 million remaining under the $50 million repurchase authorization.

In March, we took action to review our planned investments for the year and made adjustments to preserve flexibility and liquidity, while continuing to support our critical business needs. As you have seen, we have adjusted our marketing approach, both by reducing certain planned investment while also launching the "At Home with Sonos" campaign. We have taken steps to manage our inventory more tightly given the end market weakness and eliminated many discretionary expenses beyond just travel and typical in-office expenses. We are focused on having a lower operating expense run rate in the second half of fiscal 2020 as compared to the first half, which means we have also paused on some of the continuing hiring and investments we were making. You should expect some variability around sales and marketing, given the timing of events in Q3 including our promotion and new product launches. We are confident that these are the right measures to take at this time, but we'll continue to review and adjust as we learn more over the coming weeks and months.

Revenue in the second quarter decreased 17% or 16% on a constant currency basis to $175 million. Coming off a strong first quarter, we had highlighted that we were expecting some softness in the second quarter from demand pull-ins. As Patrick noted, we also saw challenges primarily from a large partner in the U.S. rebalancing inventory as well as weakness in our German market from inventory rebalancing with our distributor. Overall, across all of our markets, there was a significant impact in March from the weakened global demand environment and broad-based physical retail closures stemming from the COVID-19 pandemic. This impacted both end demand and replenishment orders from our partners in the majority of our end markets. As a result, our revenue in March declined 23%.

Sonos speaker revenue represented 66% of total revenue during the second quarter and decreased 27% from the prior year. We believe this category was more significantly impacted by inventory rebalancing measures and the effects of COVID-19 on consumer demand. In contrast, our Sonos system products revenue, which represented 27% of total revenue during the quarter, increased 22% year-over-year driven by the performance of Sonos Amp and the launch of Sonos Port in late fiscal 2019. Partner products and other revenue increased 4% driven primarily by our IKEA and Sonance partnerships, which launched in the second quarter of fiscal 2019.

In April, as discussed, we launched our "At Home with Sonos" program. We thought it was important to get back in front of consumers with relevant messaging and opportunities during this challenging time. As Patrick mentioned, Sonos Move was one of our best selling products even without a promotion. We have seen an increasing percentage of our sales shift to online purchasing during the quarter, given the physical retail closures. Our direct-to-consumer revenue during the second quarter increased 32% year-over-year. We saw this further accelerate in April with approximately 400% year-over-year growth in our direct-to-consumer channel. Overall, April is showing meaningfully better trends compared to March. We expect total revenue in April to decline less than 5% year-over-year. We are very pleased with these results given physical retail remains mostly closed. This represents a big shift in consumer buying behavior for our products, primarily for the online channel. This is also improving our inventory position relative to Q2.

Gross margin during the second quarter declined 130 basis points due to the introduction of tariffs in September 2019. Excluding the effect of tariffs, gross margin would have increased 230 basis points to 45.3%. Total tariff expenses through the first half of the year were approximately $26 million. We have not experienced any lasting impact due to COVID-19 as it relates to our manufacturing capacity. Currently, we still expect to complete our supply chain diversification into Malaysia by the end of the year. We have also submitted a request for exclusion from List 4A and are hopeful that we will obtain a positive outcome. As a reminder since February 13, we have been subject to a 7.5% tariff on goods imported from China.

Now for a little more color on opex. During the second quarter of fiscal 2020, GAAP operating expenses increased 11% on a year-over-year basis. While we made some significant reductions starting in March, we had also been investing for long term growth. Overall, the majority of the increase is driven by higher headcount in our R&D organization as we continue to invest in new products and features. Research and development expenses increased 24% to $49.6 million. This includes the addition of the Snips team. Sales and marketing expenses increased 2% to $50.5 million and G&A expenses increased 9% to $26.1 million, primarily due to an increase in legal fees related to our IP litigation. Excluding the $1.7 million in IP litigation fees during the quarter, G&A expenses increased 2%. Year-to-date, we have generated adjusted EBITDA of $64.8 million. Adjusted EBITDA for the quarter was a loss of $28.4 million.

As we look forward to the rest of the year, we don't know what a normal run rate for our business looks like, when physical retail will be open or how the economy will recover. Given the uncertainty unpredictability and volatility, we are withdrawing our previously issued revenue, gross margin and adjusted EBITDA guidance for fiscal 2020. Despite the challenging environment, we are excited about what we have seen from our five week "At Home with Sonos" campaign, the ongoing engagement from our customers, and the launch of Arc, Five, Sub and Sonos Radio. We believe that the strength of our balance sheet allows us to continue making prudent investments and the resiliency of our teams as they continue to operate from home allow us to continue delivering great experiences. We believe we are well positioned and capitalized to create value over the long term. And with that, we will open the line for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes the line of Katy Huberty of Morgan Stanley. Your line is open.

Katy Huberty -- Morgan Stanley -- Analyst

Thank you. Good afternoon. I hope you all are staying healthy and safe. A couple of questions from me. Does the incredible success of the direct channel in the month of April change your thinking about the path to market for your business over the long run? And how do you think about the advantages of having that direct customer relationship versus the advantages of having a larger third-party store network?

Patrick Spence -- Chief Executive Officer

Hey, Katy. It's Patrick. I'll take that one. Yeah, I think the -- in times like these, I think what happens is trends that were already under way accelerate in a big way and as you know, in the last two years, we've -- our fastest growing channel has been our DTC channel and it goes to the type of product that we create, but as well the importance that we see around our brand. And I think the day to day engagement through the system and the kind of listening hours we see and as well the engagement and why we're experimenting a bit with Sonos Radio is that ongoing engagement with our customers and it all comes together, right, in terms of how people are using the product and then as well, how they add another Sonos product to their system. So I do -- we've invested in it, we're going to continue to. If you would have told me that we could grow DTC the way we did in April and -- and it wasn't without some bumps in terms of like a little longer hold times on the phone for people who are doing telesales and like we had some delayed shipments through there. But all in all, it was amazing to deliver that level of growth and being able to satisfy customer demand was just very encouraging for the future.

And so I do think it's an important part of the future and this is one of those times where you take stock of the strategy and how much more do you put your foot on the gas around these kind of things. And so it definitely makes me think this is going to be an even bigger part of our future and it also points out that in these kind of times, we are the ones that ultimately make sure that we're getting people product quickly and it's all about trying to deliver to the customers as best as possible. There were a lot of distractions from the other channels, right, in going through this and so some were focused on essential goods and those kind of things. And so we -- it's something that we think is important. We think we can meet the customer demand, and I think strengthens the brand for the long term and is obviously good for the bottom-line as well. So we are definitely thinking how we continue to build on this into the future.

Katy Huberty -- Morgan Stanley -- Analyst

That's great. And then a follow-up. Brittany, how should we think just qualitatively about the remainder of the quarter? Obviously the promotion ended May 5 but then you have three new products shipping for the second half of June. Do you think there will be enough sell-in that we could see some strengths off those new products?

Brittany Bagley -- Chief Financial Officer

It's a great question, Katy, I mean, I think one of our challenges in looking forward even for the rest of the quarter has been that the two months that we really have, March and April, have behaved so differently and so obviously part of that was probably people were really getting their heads around what this meant in March and in hindsight, there is probably some of this that even started in February as people started anticipating this, given other things going on around the world. But with all of that, the sort of drastic difference we saw in April makes it really hard for us to predict what else we think is going to happen in Q3. So we've got the headwinds of physical retail continuing to be closed, who knows when that's going to reopen. And then you've got the balance from us of this strength in our DTC channel, the new products coming out and as I mentioned, we're ending April in a much better inventory position, so when do we start to see some of those orders and replenishment orders coming into Q3. So you know, with all of that, those are sort of the factors we're thinking through and one of the reasons it's really hard to guide or get a good handle on what the rest of Q3 or the year will look like.

Katy Huberty -- Morgan Stanley -- Analyst

Okay. Thank you. And Patrick, can I just squeeze one more in, a high level?

Patrick Spence -- Chief Executive Officer

Sure.

Katy Huberty -- Morgan Stanley -- Analyst

How would you describe the differentiation of Sonos Radio versus other music streaming services? And do you see it as cannibalistic of the other platforms or more of a complementary service?

Patrick Spence -- Chief Executive Officer

Absolutely complementary. There has always been the radio service on Sonos. We hadn't touched it in 15 years. We've -- what we've done is use it as an opportunity to showcase what's possible in our app now. Obviously, there is the monetization benefits on advertising and so we're putting our toe in the water on services which we're excited about. But it also does present the opportunity for partners to showcase their certain playlists or stations and those types of things. And so I think it's going to be very complementary and again it allows us to showcase the best of Sonos and how an integrated solution could be, and show our partners what's possible with their app inside the Sonos ecosystem. So I think it's good all around.

Katy Huberty -- Morgan Stanley -- Analyst

Thank you. Stay well.

Patrick Spence -- Chief Executive Officer

Thank you.

Operator

And our next question comes the line of John Babcock with Bank of America. Your line is open.

John Babcock -- Bank of America -- Analyst

Hey, good afternoon. Actually, I just wanted to follow up on the question on kind of the fiscal third quarter here. I know you're not really willing to provide guidance, but I thought maybe you might be able to provide us some sense as to how revenues kind of trended through April and into the first part of May here. And then also, I think you mentioned that inventories have kind of rebalanced, so also want to get a sense for where they stand right now.

Brittany Bagley -- Chief Financial Officer

Yeah, John. So as we look at revenue in April, it's down less than 5% year-over-year, so that's a pretty big contrast, are down 23% in March. And, yes, it's still down, but I think we're pretty happy with that number, given how much of physical retail has really remained closed. So we're just seeing a huge shift in demand to online and DTC. So that's really the best color we can give on Q3, because that's what we know. It's sort of -- it's less of an unwillingness at this point and more of it just really hard to predict what the future will look like even a month from now.

John Babcock -- Bank of America -- Analyst

Okay, that's fair. And then just with regards to the growth in the direct-to-consumer business, and I know we kind of already asked about this as well, but I mean, in general, where -- how large is that now as a percent of sales? Is that kind of 15%? Is that kind of in the ballpark and also how sustainable do you believe that growth actually is as you -- as we kind of move beyond the pandemic here??

Brittany Bagley -- Chief Financial Officer

So, we didn't disclose it as a percentage of sales for this quarter. We just give you the growth numbers. It was last at 12% of sales in fiscal year '19. So that's the last percentage of sales number we got and so you can triangulate a bit from there. You know, in terms of sustainability, I think we're very pleased with the results and as Patrick was talking about, we're going to work hard to make sure that we can keep some of that continued momentum in the DTC business. But part of that will depend on how permanently have consumer buying habits changed and when do they want to go back to the physical retail stores and is this a permanent trend for the consumer. So I think we're going to have to wait and see a lot on how consumer buying behavior actually changes coming out of this environment.

John Babcock -- Bank of America -- Analyst

Okay. Thank you. That's all I have.

Operator

And our next question comes the line of Rod Hall with Goldman Sachs. Your line is open.

Rod Hall -- Goldman Sachs -- Analyst

Yeah. Hi, guys, thanks for the question. I guess, Brittany, I wanted to start with you and just see if you could answer that -- I know that Patrick in his comments talked about the U.S. distribution channel, U.S. retail partner and then the German distributor not reloading on inventory. And I wondered if that inventory reload occurred in April or do you anticipate it to occur in the next couple of months, at the end of this quarter or do you -- does not know? That's the first question and then I have a follow-up to that.

Brittany Bagley -- Chief Financial Officer

Yeah. So we're characterizing it as a bit of rebalancing from. So it's two things, there was inventory rebalancing that went on, which I think we had called in our Q1 that we did think there was some demand pull-in and we were trying to get a view on some softness in Q2. And so we did see some inventory rebalancing from those two partners. What we then saw was COVID-19 hit and a real drop-off in demand so that the end markets were much weaker. And then with the closure of physical retail and everyone being much more careful about how much inventory they held, we saw a lack of replenishment orders and with weaker demand there was also enough inventories that everyone had. So as we come through April, we think we're in a much better inventory position. We think that that sets us up well to start getting replenishment orders, but it's kind of anyone's guess on when those will really come in. It will depend on the retailer, the channel, when does physical actually reopen, how well is each retailer doing with their online sales, how are they seeing demand. So there is a bunch of factors that make it hard for us to call when that will happen.

Rod Hall -- Goldman Sachs -- Analyst

Okay, all right, thank you for that. And then I wanted to come back to this point of direct distribution, Patrick, and see -- I mean obviously this is -- it's unfortunate this has all happened but in a way lucky from a direct distribution point of view, I guess. And I wonder if you have any ideas or how you might keep people on that platform in the future because it's such an attractive distribution methodology for you, both I think from a brand point of view as well as a financial point of view.

Patrick Spence -- Chief Executive Officer

Yeah. Thanks, Rod. And I think the thing that we've learned is people are willing to purchase audio products in a big way online. So they're not having to listen necessarily as we go through it. So people found -- and we saw through the data, people were comparing like the shipment times too, right, through this period. So it's kind of -- it's a -- I think the proposition has to be in this day and age, how quickly are you going to get it from a partner, and when we were in a position where it was quickest to get it from Sonos for sure, obviously, in terms of going through this. We, as well our customers, we communicated a lot in terms of how Sonos could help in your home office, how it can help you enjoy all that -- all of the video streaming that you're watching and how being placed into that home cinema side, all of these things and we we communicated like never before in the month of April as well. And I hear from a lot of our customers, and I did not hear that we over communicated. And so I think that ongoing communication about what we're doing is actually a really important learning from the month of April as well.

And our product was born of the home and built for this time and so, I'm very proud of the fact that we're bringing joy to people's homes in this time. And so I think we've learned that we can engage even more with our customers. The other thing that we had and we saw was people trading up, right, to get to the new products, I think as people were home and saying, you know what, now is the time I'm going to move from that product that I bought about 15 years ago to the new Amp or the new Port, right, as I go through that. And so I think, helping our customers with that journey keep it -- letting them know that there is something new there, that engagement is important. I think things like Sonos Radio and being able to serve up as well messages through that vehicle as well is going to help in terms of that engagement.

And so there's always a balance between when it becomes annoying, right, to customers for some of these things, but I think we've learned, we can engage more with our customers and they will respond by going to sonos.com and from a hygiene perspective, being really good about the service we're providing there is going to be critical and I'm glad, like, we invested a lot in terms of building that out over the last couple of years and making sure that we could address a spike in DTC demand. I mean, who could have imagined it would be a 400% spike, but you know that we could do this. And so we're going to continue to do that.

We'll look at, like, making sure we have the technology in place to do it, what the best-in-class companies are doing, but I think all of this stuff is self reinforcing and we'll see very shortly what kind of demand we get for our premium soundbar as well. Basically said, I'm seeing, I mean where our brand is, but I think we're uniquely positioned as a brand where people trust us and trust that it will be good sound and they also know that if necessary, they can return it, right, and that's not going to be an issue. We did push -- the other thing I would say, Rod, is we did push on to make sure people understand we have a money back guarantee. So if they want to do that, we'll easily take it back. And so there is no -- there's no friction there at all. And so, pushing on some of those hygiene things has actually been even more important and I think we need to be thoughtful about that going forward.

Rod Hall -- Goldman Sachs -- Analyst

Great. Okay. Thank you, Patrick.

Operator

And out next question comes from the line of Matt Sheerin of Stifel. Your line is open.

Matthew Sheerin -- Stifel -- Analyst

Yes, thanks. Thanks for taking my question. Patrick, just a follow-up regarding your comments about the upgrade program and you've got three new products coming out. You also have your new app and operating system unveiling next month, which would also appear to be a catalyst to prompt people to upgrade. So could you talk about what you're seeing there in terms of that upgrade program and whether the new app will be a catalyst or will be helpful there?

Patrick Spence -- Chief Executive Officer

Yeah. Hey, Matt. I think it will be. And you know, from our history, like, we haven't really been through these cycles. I think because we try to build products that last for a long, long time. And probably the best example, right now, we're going through are with Amp and Port, right, and replacing products that we launched 12 to 15 years ago and so I think the -- given the -- the thing I would point you to is the level of engagement, listening on Sonos over these two months has been incredible. The quick jump up the charts at Sonos Radio shows the engagement level there and then with the DTC brand and engagement in trade up, and so that is something we've just started the journey on. We launched the program late last year in terms of what was there, we tested, we made sure we could go and deliver it. We made some adjustments, right, we didn't get it right with recycle mode when we first launched the program, so we changed that up, listened to customers and changed that up.

And then through this period, I think we're learning there is appetite there and it's a little early to really build that in as we think about the future, but it will be interesting to see what we learn because we won't be pushing on people to replace their Playbar with an Arc, but we have so many avid fans and I can tell you from having done it in my own home, it is night and day difference, right, the Arc just takes it to a whole new level. It will be really interesting to see what we learn on how that drives over time and what our customers really want to do here. But I'm pleased with where we are in the trade up cycle.

And you know, S2 -- that you referenced the S2 that we're rolling out, our new OS and App just sets us up well for the future and to be bringing more innovation to the platform through high-res audio and some of those other things that I think will help us over time bring even more customers up to the newer products and so I'm excited about what we're doing on that front.

Matthew Sheerin -- Stifel -- Analyst

Okay, thank you. That's helpful. And just a question on the gross margin, I know there's a lot going on here, you had that promotion in the month of April, which sounds like it was very successful. You also have still some headwinds on tariffs and your manufacturing shifting out of China. So could you talk about how we should think about gross margin?

Brittany Bagley -- Chief Financial Officer

Yeah, it's a great question. So I would say, we have been providing it with and without tariff to start, so that's sort of the biggest delta in terms of how we've been talking about it. From a manufacturing standpoint, we still think that we will diversify for our U.S. sound production into Malaysia by the end of the year. Now, I say that sitting where we are today, there is a lot that has to go into the world getting back to normal at some point to make sure we can make that a smooth transition.

But from where we sit today, we still see that happening by the end of the year. And then if that happens, we will not be subject to tariffs anymore, unless the tariff program shifts. We're at 7.5% tariff now, so it went down as of February 13 from the 15% we were paying before. And then we have also applied for an exemption, and so optimistically, we would hope to get that exemption. And then that would be another mitigant on the tariff factor. But there are sort of multiple ways where we're working to remove tariffs from the mix from a gross margin standpoint. Without tariffs, we were at a 45.3% gross margin for the quarter. That is higher than our general long term guidance of 42% to 44% and what you're seeing here is really how we're doing from a product mix standpoint and then we had some benefit from channel mix in the quarter as well.

So going forward, where we land on that margin framework will really depend on the mix of the products we're selling and with the channels we're in, how good a job we're doing at negotiating down our material cost. Obviously, the higher our volume, the more leverage we have on some of those negotiations. And so those are the things that we're looking at as we go forward. Obviously we're pulling guidance so we're not really providing any updated guidance for gross margin at this point either. But those are the factors that are worth thinking through as you think through what could happen to our gross margin in future quarters.

Matthew Sheerin -- Stifel -- Analyst

Understood. And if there is -- one last question, I can -- I'd sneak in here, just regarding the Sonos Radio, which sounds like that's been also successful to begin with. Could you talk about sort of the P&L model there and what should we think about it in terms of contributing to profitability or is that more sort of a marketing customer engagement type of model that we should be thinking about?

Brittany Bagley -- Chief Financial Officer

Probably too early to talk about that one. We really just launched it and so as we scale the model and see what kinds of reactions we get and how our customers react and all of that, then I think we'll be more prepared to talk a little bit about that very reasonable question in later quarters, but it's just too early in terms of our launch.

Matthew Sheerin -- Stifel -- Analyst

Fair enough. Okay, thanks very much.

Operator

And your next question comes from the line of Adam Tindle of Raymond James. Your line is open.

Adam Tindle -- Raymond James and Associates -- Analyst

Okay, thanks. Good afternoon. Patrick, I just wanted to start on this shift in consumers buying behavior to online channels. I just want to touch on kind of the opportunities and threats that it brings. I think you touched on some of the opportunities in the prepared remarks. Specifically on the threats, you do have one competitor that dominates online search, got another competitor that dominate e-commerce. It doesn't look like it's impacting now as you talked about gaining share in the quarter as your DTC is up significantly. But just wanted to give you a chance to maybe address that longer-term big picture concern on those two major competitors.

Patrick Spence -- Chief Executive Officer

Yeah, thanks, Adam. I think the -- there is a couple of angles on that. Right? One is what they're doing on the product side and we've always talked about the fact that from a product perspective, they're trying to achieve something very different than we are. And through Q1 and Q2, it's been interesting because they haven't been as active in the marketplace like even at the -- even for the pops [Phonetic] as much. And so, as I mentioned, and I think as we said in our letter too, fiscal Q1 and fiscal Q2 in the streaming audio category, we've gained share in our major markets across both quarters. And so it's been interesting to see that because there hasn't been as much focus, and I would say, from them and so it's kind of interesting at the end of the day and I think we have to be prepared and we are prepared that they come back at it a little bit more focused in the fall, right, when the usual launch things happen. But we'll see, right, in terms of that front.

And then I think when it comes to e-commerce, we've been very thoughtful about the way that we've created our channel mix and over the last two years, our investments in DTC, so I am not -- I do not think that we are unduly tied to any one partner in all of this online or offline in terms of where we are. We value all of the relationships and the work and the value that our channels add. I think one of the channels that probably gets underappreciated quite frankly is our Installed Solutions channel that does a lot of the app and support work and a lot of the installations. And so I think that continues to be an important one in the future and we do really well in that channel, it's helpful as we go through it. I think the trend -- I think physical retail as we've seen on a more macro level is pretty challenged in terms of not just the crisis, but the crisis just started to accelerate trends that were already in place and I think from what I saw, Best Buy did a good job in terms of the shift to curb side, but it doesn't pick up everything that they would have if physical was there. So it will be a place for physical.

But I am really bullish on our DTC coming off of this and one of those consumer touch points was how willing are people to purchase these products online without listening. And I think we are engaging with the brand, the brand has enough awareness and a good reputation. It has the money back guarantee, it has speedy delivery and we've shown that people want to engage and want to engage directly with the brand and you build up that trust and as you know, over time, build up the system, right, so continued purchases and getting into new homes at this point is very, very important as we go through it. So they're there, with Amazon and Google, like, they're always in the things that we're thinking about, but I think we've shown in April, if we stay focused on the kind of customers we're going after and what's important to them and we focus on our direct-to-consumer efforts, it is great for our brands and great for our business as well. And so we'll continue to invest and I think the acceleration, I would say, of many brands like you if you keep doing a little more direct-to-consumer through this, is something that I think we'll see more broadly as well.

Adam Tindle -- Raymond James and Associates -- Analyst

Okay, that's helpful, thanks. And, Brittany, just as a follow-up, I wanted to circle back to the comment about less than 5% year-over-year decline in April, if I heard you correctly, it doesn't sound like that was driven by some one-time big replenishment boost or something like that. The environment isn't getting worse in May incrementally, even though it's challenged. You have three new products hitting in June. Are there offsets that I'm not thinking about here to where the June quarter could be worse than that 5% year-over-year decline that you are already experiencing in April?

Brittany Bagley -- Chief Financial Officer

I think the big thing that went on in April, and it was really the first five weeks that we ran our "At Home with Sonos" promotion campaign and so I think the question will be that, that did a great job of getting us back in front of consumers with really compelling offers. And so as that campaign is over, as of yesterday, what does that look like for a normalized run rate in May and June. If it hadn't -- if we hadn't had an April where we weren't running a campaign, I think we might have been able to say, OK, this might be a good sort of run rate base, but we really need to see how the reaction is when we're off the "At Home with Sonos" promotion campaign.

Adam Tindle -- Raymond James and Associates -- Analyst

Okay.

Patrick Spence -- Chief Executive Officer

And the one thing I just -- the one thing I'd throw in there too, Adam, is just that everyone was at home. Right? So it was -- there were two kind of factors, one was promotion, we upped the level of communications and how people get the most of their Sonos. But let's not forget as well, millions of people were stuck at home and so we don't know as some of these things begin to lift, like people -- what's the behavioral change that we're going to see too. So, I just like that.

Adam Tindle -- Raymond James and Associates -- Analyst

Got it. Everyone's asking three questions, so I might as well. I was a little bit confused on April getting better, but then the decision to do the opex reduction. So maybe just talk about how you went through that, if you've kind of gotten past the worst, April is getting better, why do we need to take actions on the cost structure right now?

Brittany Bagley -- Chief Financial Officer

So we took our cost actions in the beginning of March. So when this hit, we tried to react pretty quickly to take some cost actions and those were really, I mean, they're things that sort of everyone has done, including people aren't traveling, we've been able to significantly reduce our in-office expenses. And then we've also looked at ways we can bring down discretionary spending and all of that. We're really trying to strike the balance between taking cost actions where we think it's prudent for the business, while also continuing to invest in R&D and products in our future roadmap, so that we come out of this pretty strongly. And I think the only sort of comment on future opex would be, we don't have guidance to give, we don't know where Q3 will land, we don't know that it will land at that April number of less than 5%. So we need to keep watching and being flexible and nimble and balancing sort of the right decisions for the business from both a long term investment standpoint and an opex profitability cash flow standpoint.

Adam Tindle -- Raymond James and Associates -- Analyst

Understood. Thanks and best of luck.

Brittany Bagley -- Chief Financial Officer

Thank you.

Operator

[Operator Instructions] Your next question comes the line of Brent Thill of Jefferies. Your line is open.

James -- Jefferies -- Analyst

Great, thanks for taking my question. It's James on for Brent. Just two, could you touch on the strength of Sonos Move that you saw in April? Is there anything in particular that you'd call out that's driving that strength? Is it mostly the DTC business? Just any color there would be helpful. Thanks.

Patrick Spence -- Chief Executive Officer

Hey, James. I think it is -- as we thought about it, I think it wasn't on promotion. So I'd flag that which is pretty interesting. But the -- obviously the other side of this is, it is becoming spring time and people are going outside around their home and that kind of thing. And so I think the -- we are watching it closely but that probably has something to do with it. It's been a very well rated and reviewed product throughout. We had seen some really good strength in Australia when we launched it there last fall when it was heading into Australia's summer. And so I think the seasonality is an interesting aspect of it. I also think the versatility, as we had new homes come in and be thinking about which product they're going to choose. Move is obviously one, which has a degree of versatility that other products do not. So I think they -- I think the reasons we built the product are starting to really prove out now, which is pretty exciting for us. And so we'll see how it trends through the rest of this spring and into summer period. But it's a really good green shoot right now.

James -- Jefferies -- Analyst

Yeah, that's really helpful. Thanks. Just another one, just curious how your supply chain is holding up given the shift to Malaysia, I believe that they're still on lockdown. So just -- would just be curious to hear some color on what you're hearing from suppliers there and how we should think about that going forward. Thank you.

Brittany Bagley -- Chief Financial Officer

Yeah, I mean, I think you know we're calling out that we don't think that there is a material or lasting impact to our supply chain from this. China is already back up and running and then we are diversifying between China and Malaysia. And so we are continuing to go through that process. They are on lockdown right now but they're, I think, expected to open up again in the middle of May. And so from what we can see now, we would be on track for our diversification into Malaysia by the end of our fiscal year, sort of consistent with our plan. But, if they do end up in lockdown for much longer, then we'll come back and update that view. But that is our best view based on current information.

James -- Jefferies -- Analyst

Great, thank you, both.

Operator

And our next question comes from Elliot Alper of D.A Davidson. Your line is open.

Elliot Alper -- D.A Davidson -- Analyst

Great, thanks. Wafer called out yesterday announcing sales of stimulus checks came through, was curious if you at all saw this as playing a role in better month in April.

Brittany Bagley -- Chief Financial Officer

I wouldn't call that out for our business specifically, but of course it can be hard to tell.

Elliot Alper -- D.A Davidson -- Analyst

Okay. And then, you spoke about cash preservation, still have some left on repurchase authorization. How do you guys think about buybacks for the rest of the year?

Brittany Bagley -- Chief Financial Officer

Yeah, I mean I think in any environment, we don't really talk about the timing of when we plan to execute against our authorization. So we're very focused on liquidity and our cash balance right now. We continue to think that our stock is at an attractive valuation level and we're not pulling or suspending our repurchase program. And so we will see what makes the most sense for us as we continue to work through that authorization.

Elliot Alper -- D.A Davidson -- Analyst

Okay, appreciate it.

Operator

And thank you. I'd now like to turn the call back to Patrick Spence for closing remarks.

Patrick Spence -- Chief Executive Officer

Thanks, Suzanne, and thanks to all of you for joining. I know it's a strange times, challenging times. So, I really appreciate you taking the time, given everything that's going on in the world right now. I want to say thank you to our team who has stepped up in an incredible way to make sure we could launch Radio and all the products today. It's just been incredible to see our people just persevering during through this, the creativity, we've had people doing lab testing at home and makeshift labs in their kitchens, bathrooms, I mean it's just been incredible to see and I think that creativity and spirit sets us up well for the long term. And I'm just really proud that we've been able to bring a little joy to people in their homes during this period of time and that's what we plan to continue to do.

We've got some great new products as we go forward. We've got some experiments we're trying like Radio. So I think we're well set up for the future. In the short term, a little hard to know what's going to pan out, but I'm very optimistic and think we're well positioned for the long term. So thank you again, and we'll talk to you soon. Take care.

Operator

[Operator Closing Remarks]

Duration: 50 minutes

Call participants:

Cammeron McLaughlin -- Vice President of Investor Relations

Patrick Spence -- Chief Executive Officer

Brittany Bagley -- Chief Financial Officer

Katy Huberty -- Morgan Stanley -- Analyst

John Babcock -- Bank of America -- Analyst

Rod Hall -- Goldman Sachs -- Analyst

Matthew Sheerin -- Stifel -- Analyst

Adam Tindle -- Raymond James and Associates -- Analyst

James -- Jefferies -- Analyst

Elliot Alper -- D.A Davidson -- Analyst

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