Sonos Is Going Public: What You Need to Know

Home audio specialist Sonos has just filed its S-1 Registration Statement with the SEC on its road to the public markets. It had been previously reported that Sonos had filed a confidential version of the form earlier this year, and today's version is the public one. Based on this first version, which will likely be amended, the company is looking to raise $100 million and plans to list on the Nasdaq under the ticker symbol SONO.

Sonos has made a name for itself in the premium speaker and home audio markets, and it also jumped into the smart speaker fray with the One last year and more recently the Beam, both of which rely on third-party virtual assistants for their smarts. Here's what prospective investors need to know.

Sonos One. Image source: Sonos.

Financials and operating metrics

For starters, the company's sales have been steadily growing in recent years, albeit with some deceleration following a surge in revenue in 2014. Sonos attributed that spike to the introduction of its Playbar and Play:1 products, and said growth slowed in subsequent years due to relatively few product introductions (it only launched two products over the following three years).

Data source: S-1. N/A = not available. YOY = year over year.

Naturally, you can see a comparable trend with unit sales, and Sonos is also growing the number of households that it has a presence in. The number of households that buy Sonos products is important because consumers tend to buy more Sonos devices after buying their first, according to the filing.

Image source: S-1.

In terms of profitability, Sonos has maintained a fairly steady gross margin of around 45% for several years, although it has posted net losses over that same time frame due to substantial increases in operating expenses, particularly research and development. Sonos was profitable in fiscal 2013 and fiscal 2014.

Navigating the rise of smart speakers

In no uncertain terms, smart speakers are taking over the home speaker market, with major tech giants all investing heavily in the product category. Amazon.com (AMZN +3.83%), Alphabet (GOOG +3.52%) (GOOGL +3.57%) subsidiary Google, and Apple (AAPL 0.17%) are all players at this point, with Amazon and Google clearly leading the way with their Echo and Home products, respectively.

Sonos Beam. Image source: Sonos.

Sonos One, the company's only current smart speaker, and Beam, its smart soundbar, rely primarily on Amazon Alexa but will soon support Google Assistant later this year. There will be limited support for Apple Siri, mostly through AirPlay 2. It's this dependence on third-party virtual assistants for voice controls that creates arguably the biggest risk facing Sonos going forward, with references to it throughout Sonos' listed risk factors in its filing.

For example, Sonos One and Sonos Beam feature voice-control enablement powered by Amazon's Alexa technology while Amazon currently competes by offering speaker products of their own. As we continue to execute on our product roadmap, our success in introducing voice-enabled speakers enabled with third-party technology, especially voice control, will increasingly depend on the willingness of our technology partners, many of which sell or may develop products that compete with ours, to continue to promote and enhance our products. These technology partners may cease doing business with us or disable the technology they provide our products for a variety of reasons, including to promote their products over our own. If these partners disable the integration of their technology into our products, demand for our products may decrease and our sales may be harmed.

Sonos adds some more details about the partnership with Amazon:

Our current agreement with Amazon allows Amazon to disable the Alexa integration in our Sonos One and Sonos Beam products with limited notice. As such, it is possible that Amazon, which sells products that compete with ours, may on limited notice disable the integration, which would cause our Sonos One or Sonos Beam products to lose their voice-enabled functionality. Amazon could also begin charging us for this integration which would harm our operating results. We are working to establish partnerships with other companies that have developed voice-control enablement technology, but we cannot assure you that we will be successful in doing so. If Amazon does not maintain the Alexa integration, if Amazon seeks to charge us for this integration, if we have not developed alternative partnerships for similar voice-enabled products or if we have not developed such products on our own, our sales may decline, our reputation may be harmed and our business and operating results may suffer.

The company also points out that these tech giants "have business objectives that may drive them to sell their speaker products at a significant discount to ours," underscoring the risk of being a pure play in the speaker market. Pure-play companies need to make profits on their core products, and Sonos is already posting red ink.

Sonos is sitting in a precarious competitive position relative to its larger rivals. Amazon and Google offer cheaper products with inferior sound quality, while Apple HomePod is priced higher with incredibly good sound quality. Sonos sits right in the middle, offering a balance between price and sound quality, but relies on its competitors for their technology. Sonos is also known for its multiroom audio technology, but the tech behemoths are catching up there, too.

Between price competition and reliance on third-party virtual assistants, Sonos looks a bit too risky.