Sonos cuts price of IPO, valuing smart speaker company at about $1.5 billion

Aug 1, 2018

Sonos, the maker of smart speakers for the home, cut the price of its initial public offering on Wednesday.

The company priced its IPO at $15 a share, below the expected range of $17 to $19. At the offer price, Sonos is valued at just under $1.5 billion. In April, MarketWatch said Sonos could be worth as much as $3 billion as a public company.

Sonos disclosed its plan to go public on July 6, and two weeks later said it planned to raise up to $263.9 million, not including an over-allotment to underwriters. In selling 13.9 million shares at $15 a piece, the company is raising $208.5 million.

Sonos markets its high-end, web-connected speakers to audiophiles and music fans as the speaker industry moves toward smart assistants made by Amazon and Google. Sonos introduced its first voice-enabled speaker, the Sonos One, late last year. It counts traditional speaker makers Bose and Samsung among its competitors.

The company reported a net loss of $14.2 million on revenue of $992.5 million for its most recent fiscal year, which ended on Sept. 30. That's an improvement from fiscal 2016, when the company posted a loss of $38.2 million on sales of $901.3 million.

Sonos is scheduled to start trading on the Nasdaq on Thursday under the ticker symbol "SONO." The lead underwriters are Morgan Stanley and Goldman Sachs.

Sonos IPO: 5 things to know about the maker of high-end speakers

Aug. 1, 2018

The mature hardware company relies on retailers for sales to a loyal customer base

Sonos makes high-end speakers, and the company has tried to capitalize on increased interest in voice commands by giving its products “smart” capabilities. Sonos currently sells products that are compatible with Amazon’s Alexa voice assistant, and Sonos expects its speakers to work with Alphabet Inc.’s Google Assistant later this year.

Adding Siri compatibility is a bit trickier, since Apple Inc. services don’t generally play nice with hardware made by other companies. Sonos plans to introduce Siri on its speakers later in 2018 through Airplay 2, a sort of back door that allows Apple devices to stream audio to other devices. Sonos also has its own voice controls.

Here are five things to know about Sonos as it goes public.

Mature growth profile

Sonos has been around since 2002, and that means it’s in a different place financially than many younger tech companies. The company hasn’t raised outside money since 2014, according to FactSet, and it’s on pace to generate $1 billion in revenue for the fiscal year that ends this September.

The company posted $992 million in revenue for its 2017 fiscal year, up from $901 million in 2016, making for a growth rate of 10%. Sonos recorded a $14 million net loss in 2017, compared with a $38 million net loss in 2016.

For the first six months of Sonos’ 2018 fiscal year, which includes the holiday period, the company generated net income of $13 million. Sonos was profitable in the first half of its prior fiscal year as well.

“They don’t need to show investors they have a path to profitability, but they do need an answer to the 800-pound gorilla,” said Phil Haslett, co-founder of EquityZen, an online marketplace for pre-IPO shares. That means Sonos will need to show how it plans to compete against devices from “diversified, cash-rich companies” like Amazon and Google.

Reliance on retailers

Sonos generates a majority of its revenue from physical retailers or their websites. Best Buy Co. Inc. BBY, -0.20% is its biggest distributor in the U.S., accounting for 16% of sales in the fiscal year ended last September, while Also Group is its biggest distributor in Europe, accounting for 12% of sales.

“Any time you have concentrated distribution for a product, that brings risk,” Haslett told MarketWatch. Potentially concerning is that Sonos generated just 45% of last year’s revenue from the U.S., which means nearly a third of U.S. sales came from Best Buy.

On the plus side, Haslett said that Sonos’ ability to build strong relationships with distributors in the U.S. and Europe bodes well for its likely attempts to do the same in Asia.

A loyal customer base

Sonos has proven able to drive repeat purchases from its customers. As of the end of March, more than 19 million Sonos devices have been registered by customers, and they’re in use in about 6.9 million households. The company said in its prospectus that 61% of households registered more than one device, and among customers who initially bought one Sonos product, the average person ended up buying 1.4 more.

The loyal user base is encouraging given that Sonos fetches high prices for its products. The company’s entry-level wireless speaker costs $149, and Sonos sells multiple items for $699. Still, there are obvious limits to how many speakers a household could reasonably need.

Sonos may end up annoying its loyal users in a bid to get them to buy more products, as it appears ready to stop updating software on some of its older speakers. The company lists among its risk factors the possibility of “customer dissatisfaction” if Sonos decides to stop supporting older versions of its products. Customers “have grown to expect” this support, according to the filing, but Sonos predicts “that in the near to intermediate term, this backward compatibility will no longer be practical or cost-effective.”

Breaking out of the hardware curse?

A hardware IPO calls to mind a few high-profile disappointments over the past few years, as shares of Fitbit Inc. FIT, -0.17% and GoPro Inc. GPRO, +4.79% are both trading well below their IPO prices. The biggest success story has been Roku Inc. ROKU, +0.51% which emphasized its “platform” business during its roadshow and now generates more than half of its revenue from non-hardware sources.

Is Sonos a Fitbit or a Roku? Perhaps neither. EquityZen’s Haslett pointed out that unlike Fitbit and GoPro, Sonos has been around for a while and its financials reflect a mature company. Investors in Sonos likely won’t be expecting massive growth the way early Fitbit investors were. Compared with Roku, though, Sonos doesn’t have an obvious path to becoming a platform-based business.

Simple voting structure

Many companies that have recently gone public have complex voting structures stemming from multiple share classes, but the Sonos filing shows just one class of shares. Investors haven’t been too turned off by dual-class structures in the past, but the straightforward arrangement at Sonos is, at the very least, not a negative.

As it relates to share distributions, Haslett is encouraged by the fact that current Sonos CEO Patrick Spence isn’t a company founder.

Sonos has “a diversified base of owners compared to one founder trying to retain a lot of control,” he said.

The largest owner before the offering is KKR Stream Holdings, with 25.7% of shares, followed by entities affiliates with Index Ventures, with 13% of shares outstanding.

Sonos is about to report its first public quarter. Here’s what to watch.

Sept 10, 2018

Earnings: Analysts surveyed by FactSet expect that the company lost an adjust 18 cents per share in the June quarter.

At least six analysts cover the stock, according to FactSet, and they have an average price target of $22.83 on the shares. Half have buy ratings and half have hold ratings.

Revenue: The FactSet consensus calls for $208 million in revenue, compared with $223 million in the year-earlier period.

Sonos plunges after first earnings report as public company

Sep 10, 2018

Sonos stock fell as much as 15 percent in extended hours on Monday, erasing a trading-day gain of 13 percent, after the company reported earnings for the third quarter of its 2018 fiscal year, which ended on June 30.

Here's how the company did its its first earnings report:

• Earnings: Loss of 45 cents per share.
• Revenue: $208.4 million, vs. $208 million as expected by analysts, according to Thomson Reuters.

Revenue was down 6 percent year over year, according to a statement. The primary reason for the revenue decline was the Playbase audio streaming device one year earlier, CEO Patrick Spence wrote in a letter to shareholders.

Sonos' biggest category, wireless speakers, did see a gain, rising 1 percent to $93.9 million. But the company's revenue from home theater speakers declined 20 percent to $66.7 million. Revenue from components, including the Connect and Connect:Amp products, was down 4 percent year over year at $42.28 million.

In the letter Spence said the company wants to accelerate growth of sales directly to customers, as opposed to sales through third parties. Selling directly results in a profit margin "tends to be about 10 points better" that indirect sales, Spence said. About 12 percent of Sonos' sales is direct -- through the Sonos website, the company's app and its customer relationship management system -- since the beginning of the year, he said.

The company also provided guidance for its full 2018 fiscal year. It's expecting to report $1.109 to $1.114 billion in revenue for that period. Analysts had expected guidance of $1.112 billion in revenue for the full year, according to Thomson Reuters.

Sonos went public last month. Shares are up 32 percent from their initial price of $16.

We made good progress this quarter towards our goal of driving sustainable, profitable growth over the long-term. Q1 FY2019 was the most profitable quarter in Sonos history thanks to record sales and increased efficiency.

•We generated $496 million in Q1 FY2019 revenue, or 6% year-over-year growth.
•We delivered adjusted EBITDA of $87 million, or 34% year-over-year growth and a 17.6% adjusted EBITDA margin.
•We earned $61.7 million of net income, or 12.4% of revenue.
.
Reduced sell-through velocity toward the end of Q1 FY2019 created higher channel inventory levels than we would have liked heading into Q2 FY2019. This elevated channel inventory and our production schedule with IKEA starting in Q3 FY2019 instead of Q2 FY2019 will impact Q2 revenue but does not alter our full -year revenue or adjusted EBITDA outlook.

Q1 FY2019 results (three months ended December 29, 2018)

Revenue

In Q1 FY2019 we sold 2,384,581 products, representing 4% growth period-over-period and generated $496 million in revenue. This product growth translated into a 6% increase in revenue compared to Q1 FY2018. In Q1 FY2019, the largest driver impacting our period-over-period revenue growth was the Sonos Beam, which led to an 87% increase in home theater speakers products sold and 42% increase in home theater speakers revenue.

Home theater growth was also supported by the continued strength of SUB which, despite being in market for over six years, grew 32% period-over-period. Wireless speakers products sold decreased 11% and revenue declined 17% compared to Q1 FY2018 due to the removal of the PLAY:3 from our lineup and declining PLAY:5 sales volumes.

Despite declines in older wireless speaker products, Sonos One revenue increased 19% compared to Q1 FY2018, the quarter in which the product launched. Components products sold increased 15% and revenue increased 20% primarily due to Sonos AMP which was launched with limited availability to select partners in the installed solutions channel. AMP will be available worldwide by the end of February 2019.

Gross margin

As we outlined in our previous shareholder letter, we anticipated Q1 FY2019 gross margin to be lower than our annual outlook of 40-41% due to holiday season promotional activity. However, our gross margin of 39.3% exceeded our quarterly expectations as we made progress in mitigating component pricing pressure.

Our Q1 FY2019 gross margin result is a key driver of our EBITDA outperformance this quarter. Our Q1 FY2019 gross margin of 39.3% was 2.5 percentage points lower than Q1 FY2018. The period-over-period reduction in gross margin is consistent with our expectations as our product mix has shifted to more recently launched, lower margin products such as Sonos One and Beam.

Sonos plunged 15 percent in after hours trading Wednesday after reporting its Q1 2019 earnings and announcing its Chief Financial Officer Michael Giannetto plans to retire.