Sonos to Take $30M Hit From List 4A Tariffs, Buys Voice Control Platform
Sonos forecasts a $30 million hit to fiscal 2020 profit from the 15 percent Section 301 List 4A tariffs that took effect Sept. 1, said Chief Financial Officer Brittany Bagley on a Q4 call Thursday. Most of the impact will be in the holiday quarter, she said.
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Citing “frequent speculation” about trade negotiations, Bagley said, “We are assuming for the purposes of this call that this remains in effect for the full year at 15 percent.” To mitigate tariff exposure, the company's diversifying its supply chain out of China and has accelerated production of U.S.-bound products in Malaysia. That capacity is “ramping up quickly, and we believe we will have largely eliminated the go-forward impact of tariffs by the end of the fiscal year," Bagley said.
The CFO credited staff for minimizing the impact from tariffs, which are expected to result in adjusted quarterly EBITDA of $72 million-$82 million vs. $102 million-$112 million excluding tariffs. Fiscal 2020 revenue is expected to range $1.37 billion-$1.4 billion, 8-11 percent growth. Sonos views tariff-related costs as a “one-time” occurrence: “What we're giving you is the net number of what it's costing us to actually pay the tariff,” Bagley said. Regardless of what happens, “when we get into FY ’21, we will be shipping our U.S.-bound products from Malaysia, and that will get us out of the tariff impact.”
On the breadth of Sonos’ plans for manufacturing outside of China, Bagley said long term, the company is looking to diversify more beyond China and has a “solid and flexible manufacturing strategy.” Short term, “we are prioritizing U.S.-bound manufacturing.”
Sonos acquired voice platform company Snips for about $37.5 million cash, its first as a public company. CEO Patrick Spence described Snips as an artificial intelligence voice platform for connected devices that provides “private-by-design voice technology." The Snips team will bring "expertise and strategic IP that will make the voice experience on Sonos even better," he said.
It wasn’t clear how Snips technology will coexist with Amazon and Google, whose voice technologies are currently used by mic-equipped Sonos products including the Beam, One and Move. Spence wrote, “We do not plan to replicate the big tech ‘ask anything voice services’ but expect this acquisition will add to our customers’ ease of use and control as we continue to differentiate an end-to-end Sonos experience for our customers.” Sonos didn’t respond to questions.
In its July 2018 initial public offering, Sonos cited as risk factors large tech companies that it saw as both opportunities and threats (see 1807060017). It referenced its products’ compatibility with Alexa technology and plans to incorporate Google Assistant and Apple’s Siri via AirPlay 2. Success with voice control, it said, will increasingly depend on the willingness of technology partners with more financial resources to continue to promote and enhance Sonos products, “many of which sell or may develop products that compete with ours.”
Partners such as Amazon and Apple “may cease doing business with us or disable the technology they provide our products for a variety of reasons, including to promote their products over our own,” Sonos said. Its agreement with Amazon allows that company to “disable the Alexa integration in our Sonos One and Sonos Beam products with limited notice,” it said. Amazon could “begin charging us for this integration,” hurting operating results, Sonos said.
Commenting on the wireless speaker company's partnership with Ikea, Spence said Sonos plans to expand it. Ikea sold 30,000 Sonos-enabled products on the day it launched. Partnerships give the company access to a much broader market than the $18 billion in-home audio market, said Spence, and Sonos sees significant opportunity “leveraging our software and hardware expertise in new categories.”
On potential new verticals, Spence said Sonos will continue in the current fiscal year the pace of new products over the past three years, balancing home products with products that help it expand “into categories we’re not in today.” Those will include Sonos-branded efforts and partnerships, he said.
Q4 revenue grew 8 percent on sales of 1.5 million products, said Spence. Wireless speaker revenue rose 25 percent to $116.8 million primarily driven by Sonos One and the launch of Move. Home theater speaker revenue dropped 25 percent to $100.7 million, Spence said.
Sonos exited the quarter with over 9 million homes using Sonos worldwide. In the year, it added nearly 1.7 million, up 9 percent. Existing households had 37 percent of new product registrations, said Spence, and early data shows Ikea households are buying additional Sonos products in a similar way to traditional Sonos new households, he said.
Beginning this quarter, Sonos is changing how it reports categories defining Sonos speakers, Sonos system components, partner products and other revenue. The new structure aligns with how the company views its business, “the evolving nature of our products and how customers are purchasing from us across multiple categories,” said Spence.
Shares closed 2.5 percent higher Thursday to $14.22.