Good afternoon. My name is Emma and I will be your conference Operator today. At this time, I would like to welcome everyone to the Sono's Fourth Quarter and Fiscal 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a Question-and-Answer session. [Operator Instructions ], [Operator Instructions ]. Thank you. Cammeron McLaughlin. You may begin your conference.

Thank you. Good afternoon. And welcome to Sonos ', Fourth Quarter and Fiscal 2021 Earnings Conference call. I am Cameroon Mclaughlin, and with me today are Sonos CEO, Patrick Spence, Brittany Bagley, CFO, and Eddie Lazarus, Chief Legal Officer. For those who joined the call early, today's hold music is from Sonos radios collaboration station from Impulse Record and basketball Legend, activist and jazz historian Kareem Abdul-Jabbar. Before I hand it over to Patrick, I'd 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 of the SEC. During this call, we will 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 2021 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 our Investor Relations website at investors. sonos.com. I will now turn the call over to Patrick.

Thank you, Cammeron. And hello, everyone. Our incredible fiscal 2021 financial results underscore the power of our model and our ability to execute despite the uncertainty and challenges throughout the year. I am so proud of what our team delivered, and I'm very confident in our progress toward becoming the world's leading sound experience brand. We have a tremendous opportunity ahead and are well-positioned to see that. To start, we are thrilled to report a fourth quarter that caps off a record fiscal year 2021. We achieved total revenue of $1.717 billion, an increase of 29 % from the prior year, or 32 % when you adjust for the extra week last year. This marks our 16th consecutive year of revenue growth. Our leadership position in premium home audio continued throughout fiscal 2021 as our products continued to rank as the leading products in the wireless speaker and home theater categories in our core geographies. Demand remained very strong through the fourth quarter, driven by the continued strength of our industry-leading products. And we delivered a record $360 million in revenue despite increased supply chain constraints that we like so many others in our industry have been facing. Our fiscal 2021 results are an illustration of just how powerful and profitable our model is as we scale. We achieved record adjusted EBITDA of $279 million, an increase of 157 % representing an adjusted EBITDA margin of 16.2%, up 800 basis points. Our fiscal 2021 results put us significantly ahead of schedule toward achieving the fiscal 2024 targets outlined at our investor event this past March. Our brand is strong. We've been exciting and robust product roadmap ahead, and we are confident in our ability to continue to drive sustainable, profitable growth over the long-term. Brittany will go into more detail…

Thank you, Patrick. Since our last earnings call, the Administrative Law Judge at the International Trade Commission issued his initial decision in our case against Google. We were very gratified that the judge upheld the validity of all 5 of our patents at issue. And further ruled that Google infringes all 5 patents. As I said, on the last call, validity and infringement were our benchmarks for success because they measure the strength of our portfolio and have our theories of infringement, and thus our eventual prospects for success. In this regard, we achieved an absolutely outstanding result. At the same time, aspects of the ALJ's ruling leave uncertain the scope of the remedy we will eventually obtain at the ITC. Later this week, the Commission is expected to announce whether and to what extent it will review the ALJ's rule. And we look forward to continuing to advance our arguments before the ITC, as well as in the federal court cases we have been. The bottom, we remain confident in the strength of our cases against Google and that in the end, we will obtain a strong return on the investments we're making in holding them accountable for their widespread infringement. Now let me turn the call over to Brittany to provide more details on our results and our outlook.

Thank you, Eddie. There has certainly been a lot going on in Fiscal 2021 and as I reflect, I am truly impressed by what an outstanding year we had as a Company. Eddie and the team made great progress and further establishing our IP, we experienced incredible demand for our products, we executed in what was a dynamic and challenging supply environment, and we beat every expectation we had going into the year. We added almost $400 million of revenue to grow 29 % year-over-year, expanded our gross margins despite the global headwinds in the supply chain, and almost doubled our adjusted EBITDA margins from 8.2% to 16.2%, while generating over $200 million of free cash flow. I am very proud of what the whole Company was able to deliver in fiscal year '21. To put some more detail behind that, fiscal '21 was our 16th consecutive year of revenue growth. We generated total revenue of $1.717 billion, which was 29 % year-over-year growth, or 32 % excluding the 53rd week last year. The increase was driven by strong overall demand across all our product categories and geographies, somewhat offset by the impact of constrained product availability. Gross margin for the year increased 410 basis points to 47.2%. We received approximately $18 million in tariff refunds out of our approximately $34 million in expected refunds, and recognized approximately $14 million in tariff expense in Fiscal '21, resulting in a minimal net impact. If you excluded the effective tariffs from both fiscal '20 and fiscal '21, gross margin increased 130 basis points to a record 46.9%, driven by a shift in product mix into higher-margin products and lower promotional discounts compared to the prior year. Direct-to-consumer revenue increased 47 % and represented 24 % of total revenue compared to 21 %…

[Operator Instructions ]. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Tom Forte with Davidson. Your line is now open.

Thanks for taking my question. I have 1 question and 1 follow-up question. So 1 of the things that's been so impressive about Sonos, is that your customers have been willing to wait for your products, even before really some of the supply chain crunches we've had. Do you have any internal survey work or things of that nature that shows that their willingness to wait continues to hold steady even as the supply chain worsens?

Yes. Hey, Tom, it's Patrick here. We watch, so carefully, and we have a good handle obviously with almost 25 % of our business being direct-to-consumer on order cancellation rates. And then as well, we watch what's happening in the general marketplace and get channel feedback. We've been dealing with some supply chain issues throughout the year, so we've seen on particular products how the behavior has been, and we continue to see very low cancellation rates on those orders. We haven't seen anything in the market that makes us believe that people are moving to some other products that's out there. And I think it goes back to the fact that we are a considered purchase. You've seen the way that we continue to increase the number of products per home as well and it is that system, and we have no reason to believe at this point that any of that will change. We're very grateful for it. But we work hard to make sure that it is something that is going to continue to be above and beyond anything else they can buy. But all indications right now are that we'll continue and we really faced that throughout fiscal 2021 as well.

Great. And then for my follow-up question, on the new share buyback program, how should we think about your capital allocation decisions between investing in the business M&A and buying back stock?

I think we have stated that all 3 of those are really an important part of our plan. So we will execute on M&A, we will continue to repurchase shares through our new share repurchase program, and we are talking about really investing in the business for fiscal year '22, as well. So I don't think it's an either or, it's really all of the above.

Wonderful. Thanks for taking my questions.

Thank you.

Your next question comes from the line of Katy Huberty with Morgan Stanley. Your line is now open.

Thank you. Congratulations on the strong execution in 2022 outlook. I have a couple of questions. First for Brittany. You mentioned 1Q revenue could be down year-on-year. If you were to isolate just demand, where would you expect 1Q growth to be before considering the supply issues? And just as a follow-up to that, given cost inflation, should we expect that the gross margin in 1Q is likely to be the low point for the year?

Yeah. Thanks, Katy. It's really hard to quantify what it would look like without supply constraints, lot of unknown factors, and then -- so we're not putting a number on that, but I would say, when we think about how it might be challenging to grow in Q1, that really is all about supply and our ability to get supply into the quarter. We think that most of that demand rolls over, and is part of what gives us comfort and support for the growth outlook that we're looking at for the rest of the year. From a gross margin standpoint, Q1 is typically a challenging or a lower gross margin quarter for us because we run our promotional and more typically in Q1. Because of the supply constraints we won't be running typical promotional environments in Q1 either and so that's a bit of a balance to the significantly higher component and logistics costs that we're seeing come through in Q1

Okay. Understood. And then Patrick, you commit to product launches a year which helps deliver the double-digit revenue growth. Just at a high level, how should we think about the product portfolio and partnerships expanding to drive that 12 % to 16 % revenue growth outlook?

That -- we see a ton of opportunity in new homes, right? So we're somewhere under 10 % penetrated into the homes. We believe we can just in the markets we're in today. So that is a huge opportunity and something that we think we seize before we even get to the new products that are coming. And then as you've seen, we strike a balance between products that go into the existing categories that we're in: Sometimes a new form factor, sometimes the new price point, as well that helps us tap into new customers and reach new homes. And then as well new categories. And so, as we think about those, we're balancing all the time how we do each of those and we have some exciting stuff we're working on, and as per usual, we will share that as it is ready and it comes to market. But we definitely are excited. Like Brittany said, we're investing more in what we're doing on the product side, which I am so pleased with, and I think that sets us up for the continued kind of growth we're talking about well into the future.

Congratulations again, thank you.

Thanks, Katy.

Your next question comes from the line of Brent Thill with Jefferies. Your line is now open.

Thanks. Patrick, how would you characterize the supply chain constraints now versus a few months ago? What's your sense as you look forward into early next year? I know it's hard to maybe answer, but is there any color you can give us just as it relates to when you think we'd get back to more normal?

I think it will get better as we go throughout fiscal 2022. So I think it will improve as we progress through the year. We have been dealing with it for over a year at this particular point in time, so there's always some ups and downs in that. As Brittany has talked about, it's particularly acute in our fiscal Q1, but all indications are -- as fabs come up -- new fabs come online. People catch up with the demand that's out there. We qualify new parts in our products as well, the government and some of the infrastructure players take care of the port congestion and other issues that are there, as we get the pandemic under control. There are so many factors that go into it, but fundamentally, we believe it's something that eases as we progress through 2022. And so we'll be monitoring it very closely. I think it's -- I don't think anybody has the crystal ball to call when it will be completely open again. So I want to be a little bit careful about that, but gets better as we progress through 2022.

Great. Thank you.

Thanks, Brent.

Your next question comes from the line of Rod Hall with Goldman Sachs. Your line is now open.

Hi, this is RK on behalf of Rod. Thanks for taking my question. I wanted to ask about your fiscal '22 guidance. Could you talk about how much visibility you have at this stage, and what are the assumptions underpinning that guide in terms of both demand and supply constraints? Thank you. And I have a follow-up.

It's obviously a very difficult time to come out with guidance and there are certainly Company, who are guiding at all at this point. But our general guidance philosophy is to always try and share to the best of what we know, what we're seeing out there. And so we are looking at everything that we see in the supply chain environment and to Patrick 's point, we expect that that starts to get better in the second-half of the year. And then we're looking at everything we can see from a demand standpoint and rolling that together to come up with our fiscal year '22 guidance. So that's what gives us comfort behind the 12 % to 16 % on revenue, the 46 % to 47 % on gross margin, and the 280 to 325 on adjusted EBITDA.

Thanks Brittany. Could you also talk about your recent price increase from [Indiscernible] effect on the financials. And has it had any effect on demand so far? Thank you.

[Indiscernible] in September and so you will see the full impact of that as we go through fiscal year '22. And our view on how that impacts demand is fully factored in as we look at that fiscal year '22 guidance. And obviously we're in a supply constrained environment right now. So we have to factor that in, as we think about the impact.

Great. Thank you.

Your next question comes from the line of John Babcock, with Bank of America. Your line is now open.

My first question is actually just on the gross margin front. Can you talk about, generally, what panned out better for you in the fourth quarter than you expected because it seems like you've been a little bit better than, I think most anticipate? I'm just curious what went on there. I don't know if there was maybe a little bit of price increase in there -- price increase that went in [Indiscernible] or if that was during the quarter, if there were any other factors. But any color there would be helpful.

Yeah, there is such a mix of factors. We have continued to see benefit from product mix and channel mix. And those have been offset by supply chain, component costs, logistics, airfreight, all of that. And so it's really just a balance of how those played out.

Fair enough. And then just like 2 more quick questions, if you don't mind. I guess, just quickly, just on the supply chain impact and how that's impacted, I guess overall manufacturing, do you have a sense of like how much production you lost during the quarter from that?

Not in any way we would quantify. Obviously, we work hard to manage through that. But of course, when you're struggling to get component costs, as I called out in my remarks, that it has caused us to have some delays in our total manufacturing capacity. So that's certainly 1 of the factors limiting our supply outlook right now.

And I guess just next question [Indiscernible] Eddie or someone else wants to take it, but just on the update that we are going to get on Friday from USITC. Could you just provide a little bit more color on what you expect from them? I know you obviously can't like mention in any way which way it might lean, but just curious overall on any kind of additional points you might be able to provide. And also if there is any update on the case in California, and when we should expect a ruling there, and that'll be useful?

Sure with respect to the ITC, just to be clear, we don't expect this week to receive any kind of substantive decision. What we're going to get is an indication of whether, and to what extent, the full commission is going to review the ruling of the administrative law judge. So there could be indications where you could read the [Indiscernible] on things or there could not be, and so we're just going to have to see. There is no specific formula for what they are going to say on this date and it's also possible they could give themselves another extension of time as they did once before on this particular benchmark. So where -- like you were waiting to see what happens and looking forward to continuing to present our arguments in front of the ITC. We feel very good about where that case is, and we'll just keep playing that out. As for the case out in California, the case that was transferred from Texas, the judge in California has a somewhat unusual procedural style for handling patent cases called The Showdown. And so, the parties move forward with a small number of claims on a fast pace, looking towards hearings in the spring of '22, with the remainder of the case being set for trial in May of '23. In that way the parties can get a sense of the strength of their case early. And then the full-blown trial is, as I said, in May of '23. So we again, look forward to moving forward aggressively in that case and feel good about our prospects.

Okay. Great. That all I have. Thanks.

Your next question comes from the line of Matt Sheerin with Stifle. Your line is now open.

Yes. Thank you. And good afternoon. I wanted to ask about your EBITDA growth target ranges for next year, which are much, much wider than your revenue growth I think you're guiding 1 % to 17 % versus in mid-teens for revenue growth. So could you give us the reasons for that? Is it just because of the unknown variable costs relative to gross margin, input costs or OpEx. Could you just give us reasons for that?

No, I would say it's really -- it's 2 pieces. 1. It's the variability in gross margin, so 46 % to 47 % gives you a point there. And then beyond that, it really is about the investments that we're looking to make. And when and timing and how those come in, and what that OpEx forecast looks like for us as we go throughout the year. So those are the 2 pieces worth factoring in when we think about our EBITDA ranges.

Okay. And I'd like to throw in another supply chain question if I can, it sounds like you have some optimism, Patrick, about the supply constraints easing. But if you talk to a lot of other companies, they really have no idea when that supply is going to come online. So I'm just trying to figure out, do you have any tangible support in terms of when you're going to get that supplier. I mean, already some of your contract manufacturing partners for instance; building inventory, have you talked to suppliers? How should we get a sense of how this plays out?

Yes. Hey Matt. I think the -- given the way we've been able and our team has done an amazing job this year working with everybody in the value chain to -- really in fiscal 2021, if you look at the challenges that we had that were throughout all four-quarter s. And the way the team has handled those, and dealt with those, and understood the situation, work through all of those. And then with what we know about what happens or what is planned to happen in 2022 at this point, fabs coming online are important. And some of the plans that we have around components and having multiple sources and those kind of things put us in what we feel should be a better situation as we work through it. And to your point, nobody forecast the pandemic. And some of the challenges that arise in those kind of situations, it has been an up and down year of challenges. But we go into the year with confidence in our outlook because of the way our team has really managed fiscal 2021 and all the challenges they brought. So, it's all obviously been built into the way that we [Indiscernible] at the year ahead. And what we have planned. So hopefully that gives you some more color.

Okay. Fair enough. Thanks so much.

Thanks, Matt.

There are no further questions at this time. Patrick Spence, I turn the call back over to you.

Thanks a lot Emma. And thanks to everybody for joining. I'm so proud of the way the team delivered in fiscal 2021. I am so appreciative of our customers continuing to stick with us and all of our channel partners are installed solutions partners. It's been a tremendous year and we're so excited about fiscal 2022. We feel very excited about being ahead of our plans, for reaching those fiscal 2024 targets. And we're getting back to work. So I will see you next quarter. Thanks, everybody.

This concludes today's conference call. You may now disconnect.