Sonos - Q4 2022

Transcript

James Baglanis (Head of Investor Relations and Treasury)

Good afternoon, and welcome to Sonos' Fourth Quarter and Fiscal 2022 Earnings Conference Call. I am James Baglanis, and with me today are Sonos CEO Patrick Spence, and CFO and Chief Legal Officer Eddie Lazarus. For those who joined the call early, today's hold music is a sampling from our holiday-inspired Sonos Radio station, Thankful. Before I hand it over to Patrick, I would like to remind everyone that today's discussion will include forward-looking statements regarding future events and our future financial performance. These statements reflect our views as of today only and should not be considered as representing our views of any subsequent date. These statements are also subject to material risks and uncertainties that could cause actual results to differ materially from expectations reflected in the forward-looking statements.

A discussion of these risk factors is fully detailed under the caption "Risk Factors" in our filings with the SEC. During this call, we'll also refer to certain non-GAAP financial measures. For information regarding our non-GAAP financials and a reconciliation of GAAP to non-GAAP measures, please refer to today's press release regarding our fourth quarter and fiscal 2022 results posted to the Investor Relations portion of our website. As a reminder, the press release, supplemental earnings presentation, and conference call transcript will be available on today's investor relations website, investors.sonos.com. I will now turn the call over to Patrick.

Patrick Spence (CEO)

Thank you, James, and hello, everyone. Earlier today, we announced that Eddie Lazarus, our interim CFO and chief legal officer, has been appointed as chief financial officer. Eddie has long played an active role in our strategic planning and he knows the team and the intricacies of our business. His unique background brings a fresh perspective to the table, and he has already made tremendous contributions to our fiscal 2023 plan. I'm confident that we're in good hands with Eddie in the role. We will commence a search for a general counsel who will assume the day-to-day responsibilities of the legal organization, reporting to Eddie. Now, turning to the state of our business, I would like to begin by sharing how proud I am of our team's tremendous efforts to navigate an increasingly challenging macroeconomic backdrop and deliver our 17th consecutive year of revenue growth.

Though fiscal 2022 came in below our initial expectations, we were pleased to see trends stabilize in Q4, ending the year as planned. In challenging macroeconomic times, it is especially important to re-emphasize the resilience of our business model and the economic foundation it provides. The unique Sonos flywheel consists of acquiring new customers, which we refer to as households. These households do two things. First, our households add more products to their home over time, and second, the members of these households become advocates who help us acquire additional new customers. Existing customers telling their friends and family to buy Sonos remains the leading driver of new customers. Our flywheel is proven and remarkably consistent over the past 17 years. Even in the midst of last year's many challenges, it continued to drive growth.

We added 1.4 million households in fiscal 2022, bringing the total install base of Sonos households to 14 million. We managed this despite supply challenges crimping our ability to attract new households through both product availability and an inability to run promotions. We are still in the early innings of our growth as our 14 million households represent just 9% of the 158 million affluent households in our core markets. As has been true year in and year out, our customers added new products to their Sonos systems. Average products per household increased to 2.98 from 2.95 in fiscal 2021, underscoring how the lifetime value of our customers continues to grow. There's a lot more room for additional growth.

40% of our households are single product households, whereas our average multi-product household has 4.3 products. In other words, we are starting to get into the range we talked about at our Investor Day of 4-6 products for every mature Sonos household. We estimate that converting our single product households to the average multi-product household install size represents a $5 billion revenue opportunity alone. Of course, this will not happen overnight, but it does highlight the long runway we have to further monetize our install base. We're investing in the systems and programs to more aggressively go after this opportunity in fiscal 2023 and beyond. Now, to recap our financial performance, in fiscal 2022, we grew revenues 5% constant currency or 2% reported to $1.752 billion.

Gross profit was $796.4 million, down 2%, representing a gross margin of 45.4%, down 180 basis points. This was within our annual target range of 45%-47%, but slightly below our fiscal 2022 guidance due to lower than expected gross margins in Q4. Adjusted EBITDA was $226.5 million, representing a margin of 12.9%. From a product standpoint, 2022 was an exciting year. We launched five products and services and completed three acquisitions. We have seen strong adoption of Sonos Voice Control since it launched in May, and Sonos Radio has become the number one most listened to service on Sonos and accounted for nearly 30% of all listening. Our products are resonating with consumers.

In Q4, we saw both sequential and year-over-year improvements in our home theater market share in the U.S., U.K., Germany, and the Nordics, reaching our highest level of unit and dollar share in almost two years. The fact we are outperforming competitors and picking up share is a validation of our brand strength and category leadership. Last quarter, we discussed how Ray, our entry-level soundbar, underperformed our internal expectations upon launch. We are pleased to see that it is gaining momentum, and in the U.K. and Germany in Q4, it has become the top product in the entry-level home theater category by dollar share. Our newest product, the Sub Mini, is strong out of the gate. Since launching in October, it has garnered outstanding media reviews and has already hit with customers as we are exceeding our initial sales forecasts.

We expect this momentum to continue through the fall and into the holiday season as households build out their home theater system to enjoy sports, movies, and music at home. As you know, we've been committed to and executed upon delivering at least two new products every year since 2017. Fiscal 2023 will be no different. We've already launched Sub Mini, and we plan to launch at least two additional products on top of that in the remainder of fiscal 2023. We have built a prudent plan, balancing our commitment to profitability with an imperative to invest in the future in light of the exceptional opportunities we see ahead of us in the next few years. On the revenue side, I'd emphasize a few of the building blocks for our approach.

First, we've taken a sober view of the macroeconomic conditions using the stabilized run rates we've been seeing over the past four months as a baseline. At the same time, we enjoy the benefit of the steady repurchase behavior we have observed in our customer cohorts. As I have said before, the buying patterns and repurchase rates of our 2020 through 2022 customer cohorts continue to behave like our pre-COVID cohorts. Based on past cohort repurchase behavior, we start each year with a line of sight to achieving 40%-45% of our annual registrations target. This sticky, predictable revenue stream from our install base is something that many other consumer electronic brands do not have.

Based on these considerations, the improvement of our stock, in-stock position, our return to normal levels of promotional activity, and the exciting new products we have planned for this year, in fiscal 2023, we expect to grow revenues between 1%-7% constant currency at a 45%-46% gross margin and deliver Adjusted EBITDA of $145 million-$180 million, representing a margin of 8.5% at the low end and 10% at the high end. Eddie will give you more details about our assumptions, but I would just remind everyone that a very significant portion of the $79 million foreign exchange revenue headwind we expect in fiscal 2023 flows through to detract from both gross profit and Adjusted EBITDA.

We are making thoughtful and targeted investments to drive our medium and long-term growth while being mindful of the continued importance of delivering profitability. We will grow our team at a significantly slower pace in fiscal 2023 than we did in fiscal 2022, as we have a lot of people in place to support the new categories we are pursuing. We know this runs against the grain when it comes to recent headlines, but it's important to keep in mind that we've been profitable the last four years and have not chased growth at all costs the way many of the companies you now hear about doing layoffs have. We have been and will continue to be profitable.

The investments we are making are laying the foundation for Sonos to meet and exceed our long-term targets of $2.5 billion in revenue and $375 million-$450 million in EBITDA. While we are always cautious when talking about our product roadmap, we are investing in products that will allow us to enter four new categories, one of which we expect to announce in fiscal 2023. We have a proven track record of gaining share when entering a new category, which underpins our conviction that we will gain a larger share of the $96 billion global audio market over time. Importantly, entering new categories will further diversify our business. Our investments are focused on driving our flywheel of new household acquisition and existing customer repurchases.

Though our head count is growing, we are tightening our belts, reducing discretionary spend, and doing some restructuring to make our teams more efficient. If we start falling short of our targets in fiscal 2023, we won't hesitate to adapt to the environment, prioritize our key initiatives, and protect the profitability of our business. I am confident that we will emerge from this period of uncertainty stronger. Our flywheel of new household generation and household repurchase is working, and in the next few years, we will spin it even faster. We expect to accomplish this by focusing on three things. First, we will reset the bar in our existing product categories, further differentiating Sonos as the choice for premium home audio. Second, we will enter new naturally adjacent product categories, as you have seen us do with portables.

Third, we will expand our geographic reach, building out the beachheads we have already established in markets such as Japan, India, and LATAM. Executing on these strategies will accelerate our annual revenue growth to our previously achieved levels of low double digits with Adjusted EBITDA in the 15%-18% margin range. Now I'll turn the call over to Eddie to provide more details on our results and outlook.

Eddie Lazarus (CFO and Chief Legal Officer)

Thank you, Patrick, and hello, everyone. I'm delighted to assume the role of Chief Financial Officer on a permanent basis. The whole finance organization and my colleagues across the board have done a wonderful job of helping me get up to speed and map out our fiscal year 2023 plan. Just to level set, starting out my top three priorities are to ensure that we are making the right strategic investments to build upon our category leadership and drive long-term profitable growth, to drive efficiency in our operations and be a responsible steward of shareholder capital, and to give the investing public better tools for understanding our business by adding some additional transparency to our disclosures.

While I'll be transitioning out of the chief legal officer role, I will continue to oversee our strategy to defend our intellectual property, and specifically to hold Google accountable for their widespread, spread infringement of our patents. Turning to our fiscal year 2022 results, we grew revenue 5% constant currency or 2% reported to a total of $1,752.3 million. Foreign exchange was a $49 million headwind to revenue, and a very significant portion of that headwind flowed through to reduce gross profit and Adjusted EBITDA. On a channel basis, retail and other, which includes IKEA and other business initiatives, declined 2% and was cumulatively 56% of our sales. After two years of exceptionally strong growth, direct-to-consumer revenues declined 5% due to softer demand in EMEA, the strengthening dollar, and limited promotional activity.

DTC accounted for a healthy 23% of sales. Installer Solutions revenue, and this is a new disclosure for us, grew 28% driven by strong demand for our Amp and Port products despite persistent supply challenges as well as from geographic expansion. The IS channel accounted for 21% of our sales. Heading into the holiday season, our retail channel is in good shape as we are well-stocked, and our retail partners are pleased to see a return to our typical promotional activity. As for our other two channels, over the years, we've steadily diversified the distribution of our business to the point where our IS and DTC channels accounted for 44% of the business in FY 2022, up 2,260 basis points from fiscal year 2021. Importantly, these channels carry higher gross margins than retail.

We expect this positive mix shift to continue into fiscal year 2023 and to support the higher revenue per product that we have seen in recent years. Let me take a moment to give you some additional color on our newly disclosed Installer Solutions channel. Households acquired through our Installer Solutions tend to purchase multiple high ASP products. We have said before that AMP is a critical product to this channel, and we are pleased to be in an improving supply position. We continue to see robust performance in our Installer Solutions channel despite slowing housing activity in the U.S. Home improvement activity remains solid, and our dealers have healthy backlogs. Moreover, we have plenty of room to grow this channel worldwide. At the moment, Americas represents more than 80% of our Installer Solutions revenue.

Both EMEA and APAC are experiencing meaningful growth as we invest in building out dedicated local teams in these markets. We expect IS revenues to continue to grow into fiscal year 2023. Gross profit dollars declined 2% year-over-year, driven by 180 basis points decline in gross margin to 45.4%. Gross margin was adversely affected by a number of COVID-related supply chain issues, including increased use of air freight, spot buys due to component shortages, and general component inflation. These increased costs were partially offset by lower promotional activity and price increases that we announced in September of 2021. We estimate that air freight and spot buys were a 2.5 point headwind to gross margin.

Adjusted EBITDA declined 19% to $226.5 million, representing a margin of 12.9%. The 330 basis point year-over-year decline in Adjusted EBITDA margin was driven by lower gross margin as well as operating expenses growth of 8%. As Patrick emphasized, we invested significantly in our future initiatives in FY 2022 with an eye to ensuring increased growth and profitability over the long term. One contextual note before getting more into the details. Operating expense growth trailed our headcount growth of 21%, in large part due to paying our employees only a fraction of their annual bonus targets due to our annual results coming in below our targets. The lower bonus payout resulted in approximately $30 million of savings.

Non-GAAP R&D increased 10%, primarily due to increased headcount and product development costs and professional fees, partially offset by the lower bonus. Our software and consumer experience continues to differentiate our products, and we expanded our investment in this area. Non-GAAP sales and marketing increased 2% in line with revenue due to higher brand and marketing expenses, professional fees, and increased headcount, again, partially offset by the lower bonus. Non-GAAP G&A increased 19% due to increased headcount and continued systems and tools investment, particularly, partially offset again by the lower bonus. This increase includes a major investment to replace our legacy ERP system with the new system, which went live in the third quarter of 2022. Free cash flow was negative $74.5 million in FY 2022 and adversely affected by our investments in inventory.

In the first half of 2022, we made the deliberate decision to invest in inventory after being severely supply constrained throughout 2020 and 2021. Until the last month of the third quarter of 2022, we were on track to deliver revenue within our guidance range of $1.95 billion-$2 billion, and our supply plan reflected that expectation. Upon seeing demand soften, we made the necessary adjustments to curtail our purchasing. Given production schedules and long lead times, there is an inevitable lag before the inflow of inventory can be harmonized with run rate sales trends.

As a result, our fourth quarter 2022 inventory balance is $454 million, up 145% year-over-year. Within inventories, finished goods were at $407 million, up 163%, and primarily driven by unit growth. We expect to exit the first quarter in a much better inventory position, which in turn will improve our free cash flow. We ended the year with $274.9 million of cash and no debt. The decline in our cash balance was due to the $277 million increase in inventory that I just outlined. Completion of our previous $150 million share repurchase program, and $126 million of M&A, partially offset by the full year profitability of the business.

We are taking actions to improve our cash conversion to enable us to allocate capital towards driving our long-term growth, as well as to return capital to shareholders and offset dilution from stock-based comp. Today, our board authorized a new $100 million share repurchase program, replacing our prior $150 million program, which we completed in the fourth quarter of 2022. We repurchased in all 6.6 million shares at an average price of $22.80. Now quickly on our fourth quarter results. We were pleased to see trends stabilize in the quarter and to have revenue come in near the high end of our guidance. Revenue declined 7% constant currency or 12% reported to $316.3 million.

Last quarter, we shared how we expected that constant currency revenue would have grown year over year if we had been in stock on Amp and had not moved the Sub Mini launch into the first quarter of 2023. That is exactly how it played out. To provide further transparency, in our earnings deck, we have disclosed quarterly registration trends for FY 2022, as well as a monthly basis for the fourth quarter of 2022. In the fourth quarter of 2022, total registrations grew 5%, and we expect that October was in line with this trend. Gross margin of 39.2% came in below our expectation of 40%-42% due to increased reserves for excess component inventory. As a reminder, as we had foreseen, this quarter's gross margin was adversely affected by the timing of cost recognition for pricey spot market components.

As I will outline in a minute, we expect to return to our target annual range of 45%-47% gross margins in fiscal year 2023. Adjusted EBITDA was -$25.6 million due to lower revenue flow through and a decreased gross margin. Non-GAAP operating expenses grew 2%, considerably below our end of period headcount growth 21%, which reflects the lower bonus payout dynamic that I outlined previously. Now let me walk you through our FY 2023 guidance. We expect revenue in the range of $1.7 billion-$1.8 billion. That's between down 3% to up 3% year-over-year. As Patrick said, we are assuming demand trends consistent with where we saw stabilization in the past four months.

We expect the stronger dollar to create a $79 million foreign exchange headwind with a significantly more pronounced effect in the first half of the fiscal year. For the full year, we expect constant currency revenue to grow between 1% and 7%. Now, to help you better model our reported revenue, our FX assumptions are as follows. The euro at $0.99 and the pound at $1.13. As a reminder, EMEA was 33% of our revenue in FY 2022, and our FX sensitivity is about 4-to-1 euro to pound. Now, we realize that the rates have moved a bit since we formed this forecast with the dollar weakening some, and would note that a weaker-than-modeled dollar lessens the foreign exchange headwind to our reported revenues and Adjusted EBITDA.

We expect gross margin to land in the range of 45%-46%, roughly flat year-over-year. We do not expect to incur any air freight, and our reliance on spot buys should decrease significantly due to our inventory position as well as an improving supply environment. We expect that these significant tailwinds will be offset, however, by the combination of FX headwinds and our return to running a normal level of holiday promotions, which we've previously noted is important to driving new household acquisition. We expect Adjusted EBITDA of $145 million-$180 million, representing a margin of between 8.5% and 10%. As previously discussed, FX presents a significant headwind to Adjusted EBITDA.

Operating expenses are growing in excess of revenue due to first, full year expense of hires made in FY 2022. Second, assumed bonus payout this year of 100% of target versus the fractional payout in FY 2022. Third, our strategic and targeted hiring plan for FY 2023. Fourth, prudent investment in our product roadmap. As a reminder, the lower bonus payout resulted in $30 million of savings in FY 2022. The incremental expense incurred by our FY 2022 hiring is another $30 million. At the midpoint of our fiscal year 2023 guidance, this $60 million represents approximately 75% of the year-over-year increase in GAAP OpEx dollars in fiscal year 2023. The remainder of the increase in OpEx is targeted hiring and product roadmap investment, which is a significant reduction in pace compared to FY 2022.

We're not in the business of growing OpEx in excess of revenue, and if revenue starts falling short of expectations, Patrick and I are fully prepared to take remedial actions. Overall, I'm committed to driving further efficiency in Sonos' business. Finally, taking off my new hat for a moment and putting back on my legal hat, I'll briefly recap the recent developments in our Google litigation. In our case against Google in Northern California, Judge Alsup has consolidated the trial on the three patents at issue and scheduled it for May of 2023. He further ruled in advance of trial that Google infringes one of the patents at issue. Meanwhile, we remain undefeated in Google's cases against Sonos, having obtained additional rulings of non-infringement in cases that Google filed in Canada and in the Netherlands, and having now invalidated two more Google U.S.

Patents before the Patent Trial and Appeal Board. We, of course, will defend the new cases Google has filed at the ITC with equal rigor. With that, I'd like to turn it over to questions.

Operator (participant)

Your first question comes from the line of Tom Forte of D.A. Davidson.

Tom Forte (Senior Research Analyst)

Great. Thanks. First off, Eddie, congrats on being named permanent CFO. One question, one follow-up, and then I might get back in the queue for a couple more. It looks like you're providing new disclosure on your dealer channel. First off, thanks for the additional information. Second, how does your dealer channel compare and contrast with your retail and DTC channels?

Eddie Lazarus (CFO and Chief Legal Officer)

Sorry, Tom. What comparison did you ask for? I'm sorry, I didn't hear that one part of the question. It was a little mumbled.

Tom Forte (Senior Research Analyst)

Yeah. New disclosure on the dealer channel, how does the dealer channel compare or contrast with your retail and DTC channels?

Eddie Lazarus (CFO and Chief Legal Officer)

Well, as I mentioned, we get very high ASP, multiple product purchases in Installer Solutions, which is a great base for us. We also get very good margins out of that channel. On those bases, we love growing that channel, and as I said, we're gonna be growing that channel again in 2023 and expanding that channel in both EMEA and in APAC.

Tom Forte (Senior Research Analyst)

All right. Just a quick follow-up on that one. Can I also assume that there's less marketing dollars devoted to that channel, so your contribution margin is perhaps the highest of the three channels?

Patrick Spence (CEO)

Yes. That, that's fair.

Tom Forte (Senior Research Analyst)

Great. All right, for my other question, I'll get back in the queue. All right, another consumer electronics company recently launched a complementary line of hardware outside its historical focus, which leverages a strong brand and distribution, which is something I think Sonos could do. For example, at a high level, how married are you to solely focus on sound? Would you consider video? And then same for connected home hardware beyond sound-related products.

Patrick Spence (CEO)

Thanks for the question, Tom. We have, you know, a lot of opportunity remaining in audio. You know, we know that people spend about $96 billion a year there. So we have a lot of opportunity to keep expanding in audio and take more and more of that share, and you can bet that's what we're focused on. I do believe, you know, that our brand is strong, and we have a lot of opportunity in other categories over time. I also think that, you know, you need to be thoughtful in terms of how you move into those, how you do it for your own brand and build on your own brand strength and, you know, capabilities and all of those things.

Certainly, you know, I believe the Sonos brand positions us to take more and more of that $96 billion in audio, and even go beyond that in the long term.

Tom Forte (Senior Research Analyst)

Thank you, Patrick. Thank you, Eddie.

Patrick Spence (CEO)

Thanks, Tom.

Operator (participant)

One moment, please. Please stand by for your next question. Please stand by the call. We'll resume momentarily. Your next question comes from the line of Matthew Sheerin of Stifel.

Matthew Sheerin (Managing Director and Senior Equity Research Analyst)

Hi. Yes, thanks. Good afternoon. A couple questions from me. First on the gross margin guidance for the year. Could you sort of walk us through, you know, how that looks in the December quarter and plays out through the year? You know, traditionally, I know, seasonally the gross margin is down because of promotional marketing and that sort of thing. Then, of course, you've got this inventory issue. How should we think about gross margins playing out through the year?

Eddie Lazarus (CFO and Chief Legal Officer)

Well, as I said, we expect gross margin to be basically flat year-over-year and within our target range of 45%-47%. It's true that of course, promotions do have an effect, but the inventory situation is not going to have an effect. We’ll be able to work through the inventory we have without doing any extraordinary measures. That's just going to play out over time. Because we expected to have greater demand based on the first half of last year, we developed this backlog when demand subsided a bit. We're gonna be in a much better position by the end of the first quarter.

As I said, it's not gonna have a gross margin effect going on through the rest of the year. The big pluses for us on gross margin are going to be a reduction in these extraordinary supply chain costs that we've had, air freight, spot buys, et cetera. The headwinds will be the FX and the fact, as you pointed out, that we'll be doing our usual promotions this year, which when you balance all that out, we expect to be basically flat year-over-year.

Matthew Sheerin (Managing Director and Senior Equity Research Analyst)

Got it. Thanks for that. Kinda same question on the OpEx side. You look like you've got some meaningful step-ups in expenses, of course, the commissions being or bonuses being part of that. Could you tell us, like, where those buckets are in terms of the incremental cost? Is it mostly R&D and sales and marketing or across the board?

Patrick Spence (CEO)

Yeah. Hey, Matt, it's Patrick here. The focus has been, you know, making sure that we're investing in our product, which is our engineering and product groups and operations group, to make sure that we can continue to scale and raise the bar in the existing categories, and then expand into those four additional categories that I mentioned. That's really where we've focused the investment in those people. You know, we are definitely building for the long term with those investments. You know, you will see us, as I mentioned, you know, we're slowing the pace of investment in fiscal 2023, and you'll see those pay off, those investments that we've made in our people, in R&D, pay off in the future.

Matthew Sheerin (Managing Director and Senior Equity Research Analyst)

Okay. Just as a follow-up to that, could you tell me what the headcount of the company is and expectations as you get through the year?

Patrick Spence (CEO)

We're just over 1,800 now. You know, we'll be growing that slightly over the course of the year.

Matthew Sheerin (Managing Director and Senior Equity Research Analyst)

Okay. Thanks very much.

Operator (participant)

Your next question comes from the line of John Babcock of Bank of America.

John Babcock (Research Analyst)

Hey, good afternoon, evening. I guess just to start out, you know, broadly, given the macro volatility, you know, and also, you know, your guidance, you know, just wanna get a little bit more clarity here. I mean, it seems like your revenue range is relatively tight, but at the same time, the Adjusted EBITDA range, you know, is pretty broad. Just wanna get your thinking around this guidance and the key drivers there.

Patrick Spence (CEO)

I think you know we've assumed that our trends remain stable, right, in terms of kind of where things are. We're not economists, we're not gonna you know guess on what happens in the macro, of course. We've been encouraged by the stabilization we have seen across Q4, and obviously today we're reporting that we got that right. Then on top of that, you know, we layer in our expectations based on the resiliency of our customer base and you know what we've seen across the last 17 years in terms of repurchase rates, and then the new products that we have coming and how they factor in, as well.

We've put all of those, you know, into the mix in terms of thinking about the year ahead, and how we're going to perform from a top-line perspective. Then we factored in, as Eddie mentioned, hopefully the transparency helps in terms of understanding, you know, we'll be in that gross margin range, our typical forty, you know, 45%-47% range, for this year, be flat year-over-year, based on what we can see right now and the give and take on component costs and some of the things that we won't have to incur that we did this year. Obviously, product mix goes into that as well and factoring in some things on the new product fronts into all of that.

Then hashes out into the way that we're looking at the investments in the team, that bonus payout, FX all coming down, you know, ultimately to the bottom line in terms of where we are. I don't know, Eddie, if there's anything you'd wanna-

Eddie Lazarus (CFO and Chief Legal Officer)

Just in terms of the spread, for what it's worth, we actually started out last year with a narrower spread on revenue of $75 million. This year we went to 100 precisely because of the uncertainty. I actually think that the EBITDA flow through to the Adjusted EBITDA is actually in line with the fact that we're a little bit wider on the top line as well. Not really a deviation there, just given the uncertainty, we have a little bit bigger spread on both ends.

John Babcock (Research Analyst)

Okay, that's helpful. You know, just given the broader environment, you talked a little bit about inventories, but just was wondering if you were able to provide any more color on, you know, where inventories are right now. You know, obviously from the data we've, you know, can kinda tell where inventory's end of the quarter, but wanna get a sense onto, you know, how that has trended so far in the quarter and also if there's any detail by channel, you know, for example, how much you guys are holding versus how much retailers are holding. You know, anything you could provide on that would be useful.

Eddie Lazarus (CFO and Chief Legal Officer)

What I would say about that is that for the first time in three years our retail channel is comfortably stocked for the holidays and for the promotions. We just haven't been able to do that over the last couple of years. We're very pleased to be able to do that this year. You know, it's too early in the quarter to provide really any color on what the ultimate sell-through is going to be on all of that. As I said, we're in a position to burn down a significant amount of the finished goods inventory that we have by the end of Q1, get into a much more normalized position. You know, we think the holiday season will rebalance where we are.

Patrick Spence (CEO)

John, just the other thing I'd add on there is, you know, we you know our product cycles well, as do most of you on the call. You know, we're not like typical companies that are rushing to, you know, refresh or bring out a new season, set of stuff. Our products are long-lived, and so, you know, we have time to sell through these products as well. We you know it's something that we're watching closely. We never wanna put too much cash into that, but obviously bouncing back from what we saw in the first half of last year, you know, and being in a position where we couldn't, you know, capture all of the sales that we would've liked, we feel like we're in a much better position for this holiday period.

John Babcock (Research Analyst)

Okay, gotcha. Just last question before I turn it over. Just on the Sonos Ray, was wondering if you're seeing any signs of that cannibalizing the sales for the Beam, out of curiosity?

Patrick Spence (CEO)

Yeah, interesting question. No, the home theater's been super interesting as a category because we've seen a lot of share gain with the introduction of Ray. Beam remains really strong, and so Arc's right there as well, Sub Mini. Home theater is particularly strong right now. It's been great to see both the reception to Sub Mini and Ray really taking that top spot across U.K., Germany, and the Nordics in the entry-level soundbar. So far, no cannibalization. You know, and as we think about taking more and more of that $96 billion in audio, I think it shows that having a good, better, best kind of range in these areas makes sense, and customers are responding to that.

John Babcock (Research Analyst)

Okay, great. Thank you.

Operator (participant)

Your next question comes from the line of Erik Woodring of Morgan Stanley.

Erik Woodring (Managing Director and Head of U.S. Technology Hardware Research)

Hey, guys. Thank you for taking the questions. Maybe Patrick, I'll ask my first to you, my second to Eddie. You know, I think the slide that you show on the repeat purchase opportunity of $5 billion is extremely powerful. I'm just curious, you know, have you been able to measure kind of how long on average it takes your multi-product households to ultimately get to four products? Then, like, the second part of that is, if you haven't seen these single product households repeat purchase yet, you know, what are they looking for and/or what do you need to do to get them to buy more product? Then I have a follow-up. Thanks.

Patrick Spence (CEO)

Yeah. No, I'm glad you picked up on that, Erik, 'cause we've tried to provide a little more transparency around that, as well, and it's something we're very focused in on. As I mentioned, we even been investing in our CDP platform to actually understand this even better and give our DTC team the ability to go after customers in this way. We've really, in terms of I don't know how long it takes, you know, as we go through it, like a specific answer for you, and like we've talked about in the past, it differs depending on where you are. I will say we've significantly increased the number of people that start with multiple products. Our DTC team has done a tremendous job this year putting together sets.

If you're, you know, watching the sonos.com site, which I know many of you are, you'll see there's many more sets to get started with, and that's become a much bigger proportion of the sales that we're seeing through DTC. We've just ran as part of our early promo a sets promotion, and we saw really good take-up on that. We know that people that are starting with more than one are even more apt to come back, and purchase and do it more quickly. What we've also learned through all of this is engagement is so critically important.

One of the things that we've been focusing on, and it's one of the reasons SVC and Sonos Radio are important investments, is that if we can get people using it and using it pretty regularly coming out of the gate, we know that's as well correlated to people making a follow-on purchase and moving from single into multiple. We're really, I think, you know, making progress, and we've come a long way in terms of understanding some of those drivers and starting to put more focus into those and having kind of the systems and the teams in order to actually go after that. I'm excited about the opportunity that's there.

That's why we felt it was important to quantify that a little bit, because I do think that's something that we're gonna get better at in fiscal 2023 and beyond.

Eddie Lazarus (CFO and Chief Legal Officer)

Erik, you know, one of the interesting things about-

Patrick Spence (CEO)

Yeah

Eddie Lazarus (CFO and Chief Legal Officer)

- about that particular metric is it's just a snapshot in time, right? Because we're adding new households, some of whom will be single product households all the time. As some single product households move up the chain into multi-product households, others take their place in the queue. That's the flywheel dynamic we're trying to drive.

Erik Woodring (Managing Director and Head of U.S. Technology Hardware Research)

Yep, totally clear. That's really helpful, guys. Thanks. Maybe Eddie, my second question for you is, you know, if we just look or if we just assume that revenue in fiscal 2023 kind of on a quarterly basis grows in line with normal seasonality, it would get you to about $1.5 billion of revenue. Obviously, you're guiding to something higher than that. Any dynamics you can share around seasonality that might look different than past years, and/or does this imply, you know, that there's revenue that maybe you weren't able to capture in the last few years because of shortages that was deferred or not deferred in the accounting sense, but just deferred to the future that you might be able to capture in fiscal 2023? That's it for me. Thanks, guys.

Eddie Lazarus (CFO and Chief Legal Officer)

Well, I think it's very, very tough to look back and think through a seasonality curve because we were so supply constrained over the last year and we couldn't promote at all. It's kind of distorted the way we see things. I can just tell you what the building blocks of our plan are, and we think that they're rock solid. As Patrick said, we took a very sober view of what the baseline should be, which is we took the last four months of run rate as the baseline, and that was of course a diminished level from the kind of revenues that we were seeing earlier. We looked at what our NPIs, our new product introductions were gonna be for this year.

We don't talk about a roadmap, but I'll just say that they're very exciting. We looked at the fact that we're in stock, and we can promote. We also do a top-down view where we look at what we expect new household and registration growth to be and do a calculation based on that. When we did the bottom-up and when we did the top-down, they really coalesced right around what the guidance plan that you're seeing from us. We're not sure that looking back over last year's seasonal curve is really the right baseline. We think we took the right measurements.

Erik Woodring (Managing Director and Head of U.S. Technology Hardware Research)

Okay, I appreciate the color, guys. Thanks so much.

Patrick Spence (CEO)

Thanks, Erik.

Operator (participant)

Your next question comes from the line of Brent Thill of Jefferies.

Brent Thill (Managing Director and Senior Equity Research Analyst)

Thanks. Patrick, most economists are kind of predicting things get a little worse before they get better. When you're assuming kind of the baseline of what we're seeing right now, I guess why not bake in a little more conservatism based on what's happening across many of the different sectors? Can you give us your thoughts and your perspective on that?

Patrick Spence (CEO)

You know, we're not economists, Brent, and you know, I've been at this 25 years, and I think at this point, I'm not gonna guess at where that economy goes, but I can look at like kind of where things are today and kind of what we've seen. We, you know, we took into account that step down that happened in June, kind of what we've seen stabilize. You know, we obviously take inputs from the channel, and we think about the product roadmap and everything that's happening. Right now we feel it's most prudent to, you know, be able to plan.

It's why we've got a little bit of a wider range, as Eddie mentioned, in terms of going through it, and we'll adjust, you know, if we need to, as we go through this. I certainly feel like it's prudent, where we are today. I think if the pandemic has taught us anything, it's that we need to be, you know, nimble as we go through this period, and we will. We'll be watching it very closely. You know, we watch it daily because we get registrations and new household data. We're watching that very closely, and if we need to adjust along the way, we will. We feel like this is a good plan based on what we've been seeing and then as well, of course, the new products that we have planned and coming in the year.

Eddie Lazarus (CFO and Chief Legal Officer)

We certainly have some humility around it, there's no question about that. We also do see the data, and we did put some additional data into the investor deck this year, and I think I mentioned, which is we did show monthly registration trends for the fourth quarter. We were very heartened by the fact that in July we were up low single digits, in August, we were up low single digits, and actually in September we were up low double digits. Well, you know, we just have to go on the information we've got.

We didn't take a particular amount of joy in those numbers, but they did give us a little bit of confidence going in to this year that things were, as we've been saying over and over again, really stabilized in the business.

Patrick Spence (CEO)

The one other thing, Brent, the one other factor, you know that as we think through this period, we've seen this from the market share data over the last four months, is, you know, we believe that given our brand position, given the products that we have right now in our portfolio and what we have planned on the product roadmap, we can be taking share over this period as well. You know, we've seen that. We're gonna plan to be able to do more of that. It's why we've been focused on building the brand we have, the portfolio we have and, you know, certainly that's something I think that we expect to continue to do.

Brent Thill (Managing Director and Senior Equity Research Analyst)

Just a quick follow-up on the direct-to-consumer channel. I know you mentioned it was down. You've been making some really good progress and understand some of the factors. It feels like you've got a lot more runway to take that higher as a Sonos customer. Thank you for the sub as installed. It just seems like there's an incredible opportunity to take that higher. Can you talk through the initiatives and what you're pushing there on the direct-to-consumer side?

Patrick Spence (CEO)

Yeah, it's. We're investing in really, you know, the systems and tools to understand our customers better and make sure that we can target on a more individualized basis as well and give you know, each customer the right kind of offer based on the products that they have today, and then we know what will make their experience better. I would say that with that, you know, we've been investing to have those systems, to have the team in place and be able to make these offers, and I think that will help us drive more growth in that channel for sure. As you know, I mean, I expect that we should be able to over time.

Obviously, we've got the, you know, macroeconomic uncertainty right now, but over time we should be able to drive growth in all of these channels as we go through it. I do think that the investments we've been making in our systems and tools and our team in DTC set us up for more success in that channel.

Eddie Lazarus (CFO and Chief Legal Officer)

Yeah, pretty tough comps. You know, two years ago we were up 80-something%. I think last year we were up 47%. It did dip a little bit, but that's really because retail opened up so much more around the world. As Patrick said, we have very high hopes for being able to continue to grow in DTC.

Brent Thill (Managing Director and Senior Equity Research Analyst)

Thank you, gentlemen.

Patrick Spence (CEO)

Thanks, Brent.

Operator (participant)

For your next question, we will return to Tom Forte of D.A. Davidson.

Tom Forte (Senior Research Analyst)

Great. Thanks. Three more relatively quick ones for me. First one, how should we think about your ability to price locally to offset the impact of the strong U.S. dollar?

Eddie Lazarus (CFO and Chief Legal Officer)

Just as a reminder, we did take a price in September of 2021. We always wanna be careful about not double-dipping too aggressively. We're going to, of course, look at price, especially given the FX headwinds. That's something we'll revisit after the holidays, but we have nothing to announce on that.

Tom Forte (Senior Research Analyst)

Great. You sort of touched on this in your prepared remarks, but I was hoping you could talk about a little more. A competitor is reportedly laying off staff in its hardware unit. From your vantage point, how has the competitive landscape changed over the past year? Is it possible that more companies with diversified business models may scale back their hardware efforts given the current challenging macro environment?

Patrick Spence (CEO)

Yeah, Tom, it's Patrick. I do think that, you know, there's been rumors, obviously of the kind of money that. We know that there's been some companies that have been in this space and using hardware as a way to, you know, get into, people's homes for other reasons, right? Other strategic purposes and other ideas they've had about potential services to layer on top that haven't panned out. I do think you will see more sanity, quite frankly, return to the hardware space in general. I think, you know, the path that we've been on, around sustainable profitable growth is something that you see all companies, you know, scrambling now to be able to get to. I like the fact we already have that discipline, in our DNA.

It's something we always have to, you know, keep working on. It's why I believe that right now is an important time to continue to invest in R&D, continue to invest in product, and actually go after additional categories because, you know, we can do it from a place of discipline, and we can come out of this stronger. You know, as others are fearful, we can use it to get stronger and start to enter new categories as well and take more of that opportunity. I do see this period as one of opportunity for Sonos and setting us up for, you know, even more growth in 2024 and 2025.

Tom Forte (Senior Research Analyst)

Excellent. All right, last question, I promise. I think this one's important though, 'cause I think some investors misunderstand the relationship between maybe new housing starts and your sales. How should investors think about the sales of your products when consumers move versus when they remodel their homes 'cause they're unable to move?

Eddie Lazarus (CFO and Chief Legal Officer)

I'd say, you know, that you've captured the yin and yang of it, right? The housing starts and movement for housing sales is down just at the moment. At the same time remodeling is up. When you talk to our IS channel, which really handles a lot of that sort of thing, you find that they're very encouraged by what they're seeing in the remodel market. They have a healthy backlog of orders. Notwithstanding the temporary slowdown in housing starts and in the housing market itself, because of the balance in that channel, we think we're in good shape.

Patrick Spence (CEO)

Yeah, certainly all of those, you know, new homeowners from the last couple of years haven't yet, you know, outfitted their house with their sound systems and all of those things. This is the, you know, perfect way to, you know, really in an attainable, kind of way, be able to go out and make your home an even better place, right? Especially if there's pressures in other areas, as people maybe reduce travel and those kind of things after the swing back then, you know, investing in Sonos to make your house a little better is a pretty attainable thing given the price points that we have.

Tom Forte (Senior Research Analyst)

Great. Thanks again, Patrick. Take care.

Patrick Spence (CEO)

Thanks, Tom. Yep.

Operator (participant)

At this time, there are no further questions.

Patrick Spence (CEO)

Great. Thanks, Paula, appreciate it, and thanks everybody for joining the call today. We look forward to talking to you again in February. Take care.

Operator (participant)

Thank you for your participation in today's conference. This does conclude today's event. You may now disconnect. We are clear from the call.