Sonos has been on a roll, but that continued ascension hit some major headwinds as supply chain issues, inflation and a rapid softening in market demand in June resulted in lower-than-expected quarterly revenues. Calling the current situation “a dynamic and challenging environment,” the global wireless audio company reported its third quarter (Q3) fiscal year 2022 revenues decreased 1.8% year-over-year to $371.8 million. The situation forced the company to lower its revenue outlook for the year from its previous 14% to 16% rate to just 1% to 2%. As a result, Sonos stock (Nasdaq: SONO) is down 22% in early trading on Wall St.
“We have seen the macroeconomic backdrop become significantly more challenging for us starting in June as the dollar’s appreciation and high inflation have adversely affected consumer sentiment globally, particularly in the categories in which we play. As a result, revenue missed our expectations for Q3 and we are adjusting our FY22 outlook accordingly,” comments Patrick Spence, CEO, Sonos.
“Although we cannot predict when macroeconomic conditions will normalize, we remain confident that, when they do, we will return to double-digit revenue growth. We base this on our category leadership position, our flywheel of new and existing customer repurchases, and robust product roadmap. We expect to weather the current environment while operating from a position of strength: we are profitable, we are debt free, and we have a huge market opportunity. We are tightly focused on expenses while prudently and deliberately investing in a number of products and initiatives in new and existing categories that we believe customers will love and will drive our long-term success.”
Among the focus on expenses is a pause on travel and hiring, as well as a review of other operational expenses. The company notes that in June, there was a huge market shift away from spending in-home to spending on travel.
Among the more disappointing results was related to the Sonos Ray compact soundbar, which debuted in June with positive media reviews and good feedback from retailers.
“In June, we launched Ray, our compact soundbar, which offers the best bang for your buck under $300. We observed that the launch was impacted by softening consumer demand, compounded by a substantial drop in TV sales versus last year. As a result, Ray is significantly missing our expectations for the year. Nonetheless, we remain incredibly excited about having a terrific product at a new price point that has the potential to reach new customers. Looking beyond the short term, we expect that Ray will be very successful as it continues to receive excellent reviews from tech and lifestyle media,” says Spence.
Speaking specifically about the Ray and the Roam Colors launches in June, Spence noted to investors, “We just didn’t see the demand really materialize in the way that we’d expected, given the macro environment. And that really compounded because we also saw retailers see that same macro weakness across all of their inventory positions.”
On a positive note, Spence says the demand for the Sonos Amp has remained strong among custom installers; however, the product has been in short supply. Spence noted, “As we talk to installers, they continue to have an enormous amount of demand for that product and can’t wait for us to get back in stock on it. It is one of the products where we’ve had the biggest challenge from a component standpoint.”
Among the financial details from the Sonos Q3 report include:
- Adjusted EBITDA of $42.1 million compared to $46.7 million last year
- Adjusted EBITDA margin of 11.3% compared to 12.3% last year
- Cash flows used in operating activities of $6.7 million
- Free cash flow of ($16.0) million
In addition to the Q3 revenue numbers, the company also provided a 2022 fiscal outlook. According to Sonos, it is forecasting revenues in the range of $1.730 billion to $1.755 billion. These numbers represent growth of 1% to 2% from fiscal 2021. That compares to a prior outlook range of $1.95 billion to $2.0 billion, which represented growth of 14% to 16% from fiscal 2021.
Some of the other figures the company is projecting include its estimated Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) will be in the range of $215 million to $230 million, which represents a decline of 23% to 17% from fiscal 2021. This compares to a prior outlook range of $290 million to $310 million, which represented growth of 4% to 11%.
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Looking further ahead, Sonos states that because of the uncertainty of the macroeconomic landscape, the timeline to achieve its previously issued targets of $2.5 billion revenue, 45% to 47% gross margins and 15-18% Adjusted EBITDA margins will be extended beyond the fiscal 2024 year.
Sonos CFO Steps Down
In separate news from its Sonos Q3 financial results, the company has announced that Brittany Bagley, its chief financial officer (CFO), is stepping down to pursue another professional opportunity. Eddie Lazarus, the company’s chief legal officer (CLO) will succeed Bagley as interim CFO effective Sept. 1, 2022.