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Sonos Stock Gets It Right the Second Time Around

By Rick Munarriz – Nov 16, 2018 at 9:20AM

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The maker of high-end wireless audio systems sees revenue shoot higher in its first full quarter as a public company.

Sonos (SONO 0.38%) has had a rough run as a public company since its summertime IPO, but the maker of wireless speakers is on the verge of turning the beat around. Sonos posted better-than-expected financial results after Thursday's market close, finally giving the stock a reason to pump up the volume. 

Revenue rose 27% to hit $272.9 million for the fiscal fourth quarter, blowing past the $245 million to $250 million -- or 14% to 17% growth -- that it was targeting two months ago. Analysts were perched near the high end of Sonos' range, but obviously that wasn't high enough. Gross margin contracted given the recent release of new products, but shrewd cost controls as we work our way down the income statement end with Sonos almost breaking even. Its net loss for the quarter shrunk to $1.7 million or $0.02 a share. Wall Street pros were bracing for a deficit of $0.10 a share. 

A Sonos speaker in a kitchen.

Image source: Sonos.

Getting loud at the right time

Sonos wasn't exactly a hot commodity this summer. It was looking to go public between $17 and $19 a share, settling for $15 to get its IPO bankrolled three months ago. The shares went as high as $23.60 on its second day of trading, but a rough fiscal third quarter torpedoed the early momentum. Revenue declined 7% in Sonos' first quarterly report as a public company, and the stock eventually buckled below its IPO price heading into this week's report

It didn't seem to matter in its previous report that Sonos' summer prospectus clearly warned that it would be posting a decline in revenue for the fiscal third quarter. The performance was going to be pitted against the prior year's successful release of a big-ticket sound base. 

Investors already know that there will be quarterly lumpiness here. This is a release-driven business, and while Sonos has posted annual revenue growth for 13 consecutive years -- and it expects to stretch that streak to 14 -- the quarter-by-quarter breakdowns will be volatile. We've gone from a 7% decline in the fiscal third quarter to a 27% surge this week to guidance calling for revenue to decelerate to 3% to 6% growth in the current holiday-containing quarter. Shareholders are going to want to buckle as they ride this one. 

There were a lot of moving parts behind the blowout fiscal fourth-quarter's success. A 63% surge in home theater speakers revenue -- fueled largely by the quarter's launch of Beam -- helped lift a more modest 4% uptick in wireless speaker revenue and an actual dip in components revenue. An important note here is that Sonos is selling a lot more product than the top-line moves imply. The product mix is driving average selling prices lower, but at the end of the day this is a company that is dramatically ramping up its installed base of users. Sonos sold more than 5 million products for all of fiscal 2018, adding its presence to 1.5 million new homes in the process.

Guidance for the current quarter may be less than ideal, but Sonos is still projecting 10% to 12% revenue growth in fiscal 2019. Its long-term goal is to have adjusted EBITDA grow twice as fast as revenue, and the outlook on that front calls for a 20% to 27% surge this new fiscal year. Sonos is finally playing beautiful music for its stakeholders.

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has the following options: short January 2019 $15 calls on Sonos Inc. The Motley Fool has a disclosure policy.

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