On Sept. 10, wireless home audio and smart speaker dynamo Sonos (NASDAQ:SONO) issued its first quarterly report since its debut on the public markets. In the segment below, our Industry Focus: Consumer Goods team updates investors on the company's latest developments, including:
- Post-IPO performance
- Headline numbers from the company's fiscal third-quarter earnings report
- The reason Sonos' top line slipped despite double-digit volume growth
- Why this was a classic "mixed bag" earnings report
- New markets and partnerships
To get context around Sonos' recent stock performance, simply click below.
A full transcript follows the video.
This video was recorded on Oct. 2, 2018.
Vincent Shen: One company that we didn't really have a chance to revisit was Sonos, which I think deserves some attention after the last several weeks of volatility and new updates. Asit and I first looked at the company's IPO filing in early July. I listened to that episode again. I'd say we were cautiously optimistic on this business. Would you say that's a pretty fair take on our previous discussion?
Asit Sharma: I want to flip it a little bit and say that we were optimistically cautious, given the stock movement. [laughs] I always look at the bright side of things, so I want to put a little spin on that. You're right, Vince. I think we were cautiously optimistic on this stock.
Shen: Some of the encouraging trends that we looked at were user adoption, some of the repeat purchases, and the relatively modest but consistent growth. The major red flag, however, was something we called the frenemy relationship that Sonos has with some of the bigger tech companies like Amazon, Apple and Alphabet with smart speakers, especially, becoming a very big part of Sonos' future roadmap.
Today, I want to bring listeners up to speed on the state of Sonos, and to consider whether some of the recent developments that have come up for the company really change the big picture thesis for the stock.
Since our initial takes, Sonos priced their deal at $15 per share, a valuation of $1.4 billion, which is below its target range of $17-19 per share. What that means is, when a company prices its IPO under the range like that, it means they failed to drum up sufficient demand from investors at their desired valuation. Sonos priced at $15. They actually closed their first day of trading at $19.91, so they were up 33%.
For the company's first month on the market, the stock largely stayed in that high teens range, at least until it released its first bout of quarterly earnings as a public company. Since then, Sonos is down about 30%. They've fallen below that $15 starting point.
Let's start with a brief discussion of that earnings report. What was your take, Asit?
Sharma: The biggest thing that leaped out at me was the company's top line. Sonos generated some $208 million in revenue in their fiscal third quarter. The volume of products that they sold jumped 11.4%. I started to do the math, and I'm looking for a revenue increase, but revenue actually decreased by almost 7%. That's because, in the third quarter of last year, the comparable quarter, the company launched its Play-based product, which has a manufacturer-suggested retail price of $699. A $700 product. This year, the company sold more of its wireless speakers, including this Sonos One product, which we talked about on the pre-IPO show. That speaker carries an MSRP of $199. So, even though the number of shipments grew, because that price point dropped off so drastically, the company actually had lower revenue than the previous year.
We're going to get more into this in this discussion. I just want to foreshadow a little bit. Management perspective on that is, "We have product introductions, according to what consumers are responding to, not any kind of ramp where we're analyzing the average selling price of our products and trying to keep that consistent." That's something I want to peel the onion back on a little bit.
That's what jumped out at me, Vince, is this drop-off in revenue. Now, I should say that that still was within the projected range that management had put out. The company's still on track to meet its projections for somewhere between 11-12% total revenue growth for the year with one fiscal quarter left in the year.
Shen: This was, for me, a picture-perfect example of a mixed bag report. If you're a Sonos bear, that year over year decline in revenue that was reported, it's tough. Even though, as you mentioned, Sonos came in at the top end of the guidance they provided in August, no one really wants to see a recent IPO report negative growth, especially in their first quarter out of the gate. So, even if the decline for that makes sense, with the Play base having the higher price point, and the Sonos One having a lower price point, I think all that makes sense, in terms of how they have to fill the inventory channels with some of the sales with a new product release. I get that. But, as an investor, somebody seeing that as a headline report for Sonos' earnings, it can be a little bit discouraging. I think that reinforces some of the worries that people might have about competitors undercutting the company, which we'll get to momentarily.
Also, in the report, on the bottom line, the company's loss widened to $0.45 per share from $0.26 last year. There's a weaker margin profile, as well, for some of these new smart speakers that Sonos is pushing, another thing that a lot of bears are looking at.
If you're on the more bullish side, you probably point to the unit volume growth. It was 11%, like you mentioned, to about 887,000 units. That means more of the company's products are entering these households, creating more loyal new customers, and hopefully increasing the stickiness of the Sonos ecosystem for existing users. Keep in mind that 30% of product registrations in 2017 were for existing customers. That speaks to some of the points we made in the last discussion for this company, about how that initial purchase of one speaker usually leads to subsequent purchases of additional speakers, to essentially build out the Sonos ecosystem. Another positive point if you're more on the bullish side of this stock, the company also made its entry into Japan, which presents a lot of long-term growth potential as the second-largest music market. Very tech-savvy consumers there.
Then, tagging along with that, in terms of growth opportunities, Sonos has begun to push into new target markets. They had a partnership with Sonance to build out an in-wall or outdoor audio solutions. The company's looking beyond the seven million households where Sonos already has a presence to other types of spaces, as well.