Kicking the Tires on Sonos' Profitability and Balance Sheet

Sonos has enjoyed enviable growth due to the explosion of interest in wireless audio, content streaming, and voice-enabled smart speakers. As the company prepares for its debut on the public markets, the Industry Focus cast combs through Sonos' preliminary registration statement to get a read on its financial health.

Click below to learn what prospective shareholders should know about the profits and resources of this emerging, tech-enabled audio company.

A full transcript follows the video.

This video was recorded on July 10, 2018.

Vincent Shen: Something else I'd like to share, in terms of some of the profile, is the fact that Sonos sells its speakers through third-party brick-and-mortar retail partners, over 10,000 of them. The company actually generates over half of its revenue abroad in more than 50 countries. I was actually quite surprised to see that. I'm curious what your thoughts are there, in terms of how the markets break out for the company.

Asit Sharma: I'm pretty interested in their geographical distribution. It's pretty nice for a young company. If you look at the revenue breakdown in the first half of 2018, in the Americas -- North America, basically -- the company had 50% of its revenue derived from that region. 45% came from Europe, the Middle East, and Africa. Atypical in a company which is so young and fast-growing, especially in the hardware business. Asia Pacific represented just 5% of sales. The company mentions in its filing that this is a region of enormous opportunity.

Of course, we talk ad nauseam on this show about how important markets like China are. I want to talk about a different market for just a second, and that's the market of Japan, which the company singles out in its filing. It's under-penetrated. I've had the opportunity to go to Japan. It's a music-mad country, and it's a very technologically advanced country. This country in particular is a market where I think they could find millions of dollars of revenue in the future once they penetrate it. I really like the way that revenue is composed.

I want to say one more thing about revenue, going back to Vince's point about the multi-year acceleration trend in revenue. It's not sky-high, as we've seen with some software companies. On this show, we might talk about fast-growing consumer goods companies -- let's say Canada Goose, for example -- which have double-digit revenue growth year after year after year statistics when they show their filings. This company is more an 8-9% compounded annual growth revenue company. That's not such a bad thing.

The one thing, if you do buy into Sonos, which you have to be familiar with, the revenue cycle is driven by product introduction, as Vince alluded to. It can be lumpy. They're warning you in this filing that, "You may buy this stock, and next year, instead of an 11-17% gain, which we're on track for this year, we might have a flat year." There's a note of caution in this. It depends upon the introduction of new speakers to drive the next revenue cycle.

Shen: That's a really great point to keep in mind. Driving some of the additional growth that we've seen recently, they have the Sonos One, they also have the Sonos Beam. They're expected to release additional smart speakers that feature Google's voice assistant technology, and then hopefully some backdoor approaches to how to partner with Apple products, as well.

Moving on to the bottom line margins, some of the profitability side there, as well. I want to cover this quickly. The company has reported shrinking net losses. I think the picture looks even a little bit better if you consider the adjusted EBITDA metric -- that's earnings before interest, taxes, depreciation, and amortization. In Sonos' case, they also back out stock-based compensation.

Overall, I think we have a situation here where the company is in a pretty solid and improving financial position. As of March 31st, Sonos had about $120 million of cash on hand; debt of just $40 million. Combined, that perspective, with the more than $60 million of positive operating cash flow last year, I think this company is in better shape than many of the other IPO candidates that are out there that are trying to go public.

I'm curious, any thoughts here in terms of the bottom line and other financial aspects before we move on to the bigger picture competitive elements and landscape for this company?

Sharma: Sure, two quick points. That gross margin that you talked about, Vince, that's partly due to the fact that Sonos uses one single contract manufacturer. It does a lot of R&D and a lot of testing at its home base office, but it outsources the manufacturing of its products to a company called Inventec. That's source of profit generation, but it's also risk to be aware of. If that supplier has a disruption, that could be bad news in a particular quarter for Sonos. That's something to keep in mind.

Also on that bottom line, I think that this speaks to the use of proceeds. It's something that I always try to discuss when we talk about these IPOs. The use of proceeds for Sonos is pretty general. They don't have a specific goal in mind, like, "We want to raise $X million and acquire a competitor." What they're saying in their filing is, "We want this to introduce ourselves to the public markets. We want to use these funds or whatever is remaining after all the transaction fees are taken care of to just add to working capital, general corporate purchases," very plain vanilla type of uses for the cash that they're going to raise.

What they're saying in their filing is that, "Going forward, we want to perhaps do a secondary offering, maybe offer some debt on Wall Street." This is a way for the company to move to a larger playing field, to have more name recognition. I like that vs. what we've seen in some other IPOs in the last two years, which is, "Hey, if you don't send the money right away, there won't be a wedding in May." Have you seen that commercial, Vince?

Shen: Yeah, I hear you.

Sharma: We've seen that, we've talked about one or two of those companies on the show. Blue Apron is one example. This is a much more stable company. I think Vince gave you a great rundown. The balance sheet is solid.