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 Sonos First Quarter Fiscal 2022 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] Thank you. Cammeron McLaughlin, you may begin your conference.

Thank you. Good afternoon, and welcome to Sonos' first quarter fiscal 2022 earnings conference call. I am Cammeron McLaughlin, and with me today are Sonos CEO, Patrick Spence; and Brittany Bagley, CFO. Chief Legal Officer, Eddie Lazarus, will also be available during the question-and-answer session. 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 first quarter 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 our Investor Relations website at investors.sonos.com. I will now turn the call over to Patrick.

Thanks, Cammeron. And hello, everyone. Our record first quarter results illustrate the continued strong demand for our products. Yet again, we have proven the power of our model as we scale and our continued ability to execute better than most in a challenging supply chain environment. Our team continues to go above and beyond, successfully navigating everything from constrained ship supply to logistical bottlenecks to deliver on behalf of our customers and stakeholders. Our record results are a testament to all of the hard work our team puts in every day, and I would be remiss if I did not thank the entire Sonos team for their dedication and commitment toward building the world's leading sound experience brand. Our fiscal 2022 is off to a strong start, and we are increasingly confident in our ability to deliver another record year. Demand remains strong, driven by the continued appeal of our industry leading products, and we delivered a record $164.5 million in revenue during the first quarter. As we discussed last quarter, we expected heavily constrained product availability to offset our potential growth in the first quarter. We are pleased to have modestly exceeded our own expectations. As a result of our strong performance in the first quarter and our outlook for the remainder of the year, we are on track to deliver our 17th consecutive year of revenue growth and have raised the low end of our fiscal 2022 revenue guidance range. We now expect to deliver 15% revenue growth at the midpoint. This raises the midpoint from our prior outlook as we were able to deliver more than we were expecting from a supply standpoint in the first quarter and remain confident as we look to the remainder of fiscal 2022. We continue to invest in our business to…

Thank you, Patrick. As you can see from Patrick's comments and our first quarter results, we continue to be proud of the strength of our business, driven by the fantastic products that our new and existing customers enjoy. We are off to a strong start for fiscal 2022. Let me first focus on our Q1 results. Revenue in the first quarter increased 3% or 3.5% on a constant currency basis to a record $664.5 million. Demand remained strong during the quarter, but we continue to be supply constrained on most of our products. These constraints were the main reason we didn't run our typical holiday promotion, and they also impacted our results, especially in our core Sonos speakers product category. Clearly, our revenue growth during the quarter would have been higher, if not for supply constraints. While we continue to have a significant backlog and low channel inventory, we were able to do slightly better than we expected during the quarter. This was the result of strong logistics, which allowed for better supply timing at the end of Q1. The Americas and EMEA both grew by 2% during the quarter. Adjusted for currency, EMEA increased 5%. APAC increased 18%, primarily driven by available supply to support the strong demand. Sonos speaker revenue was down 5% year-over-year as this category was most impacted by the industry-wide component availability challenges. Sonos system products revenue increased 38%, driven by the continued strength of our installer channel and improved availability of our component products. Partner products and other revenue increased 37%, primarily driven by our partnerships with Sonance and IKEA. Gross margin increased 140 basis points to 47.8%. The improvement in gross margin was driven by the reduction in holiday promotional activity and product mix, somewhat offset by higher shipping and logistics costs. We…

[Operator Instructions] Your first question comes from the line of Brent Thill with Jefferies. Your line is now open.

Good afternoon. Patrick, many are exploring the reopening theme and M&A ask how Sonos will benefit through the reopening as we shift from our homes back into the world. And Brittany, many are still asking about the supply chain. There's been recent news about ports starting to open and things start to move a little bit better. Can you just give us a sense on that side on the supply chain side? A – Patrick Spence: Hey, Brent. So I'll take the first one on the reopening, if you will. Look, I think there are -- one, we have products like Roam and Move, which are well positioned as people leave their homes as well. So I'd remind everybody that Sonos is well positioned and more and more becoming company that delivers the ad experience throughout your life, not just at home, and that we have some big macro tailwinds around the Golden Age of Audio, Hollywood at Home. And Hollywood at Home, for instance, I think we all know the streaming companies are investing tens of billions of dollars in new content, and people are going to continue to consume that content, and we're very well-positioned with our home theater play, and then the work-from-home as well. Remember, our -- I think our lives have changed forever. And there's going to be more and more people that are working from home. And they're going to improve their homes, they're going to be moving and Sonos plays a role there. And I think we can play a bigger role over time. So there's a lot there, and then I would point back to our model and the fact that through all the different times we've gone through and now 17 years of shipping products. And the thing that I always come back to is the fact that we have a strong customer base that adds products every year, and they tell their friends and family to get Sonos, right? And so we know the number one driver of new homes continues to be existing customers telling their friends and family, and we just added a lot more in the last few years. And so we expect that to continue even as the world starts to reopen. Brittany, I'll turn it to you on supply chain.

Yeah. Thanks, Patrick. And Brent, I would just -- I'd really hit that last point Patrick made in terms of looking forward. We got a lot of great new homes in over the last few years, and those new homes will continue to drive repurchases for us going forward. So as we talk OpEx, you'll also hear us continuing to invest in brand and marketing to go out and drive more new homes as we go forward. But the new homes we've gotten over the last couple of years continue to be really powerful for us as we go forward, so just wanted to double underscore that for people. From a supply chain perspective, I mean, it is definitely still challenging out there. Component shortages especially continue to be pretty difficult. I think as we called out, one of the reasons we did better than we expected in Q1 was really because we did a better job from a logistics standpoint. So as you mentioned, ports and stuff like that, I mean, they're certainly still challenging. But I think what we saw is we did a little bit better at ports. We did a little bit better in terms of getting product in with airfreight. We did a little bit better with shipping times and all of that allowed us to have a stronger Q1 as those logistics really helped us overperform in Q1. I think we're going to be talking about supply chain for the rest of the year. But hopefully, as we get out into the end of the year, we start to have some signs of improvement, and we're talking more about that story.

And the one thing I'd just layer on that as well is I think we've really shown over the last six quarters, and really over the 17 years, unique ability to manage some of the challenges that come along on the supply chain side. And so as we saw, once again, in Q1, our team did an incredible job at figuring out how to deliver more product than initially expected to our customers, which just bodes very well for how we handle any of the challenges in the future. Thanks Brent.

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

Yeah. Hi, thanks for the question. Patrick, I wanted to come back to the homes growth trajectory and just kind of that homes growth has been slowing, and I would have thought that into pandemic, if anything, you guys would have maintained kind of that 20% annual growth rate, especially with the Roam, I thought that would help to penetrate more homes. So I just wonder if you could talk a little bit about where you're at now with homes passed, which is 12.6 million. And where do you think you could get to and what may be some of the strategies for increasing home penetration are, or whether you think this is the right number of homes and kind of all things are firing on all cylinders from a home penetration point of view. Thanks.

Hey, Rod, I don't think all things are firing on all cylinders because we've still been supply constrained in some of the channels at, which we see greater new homes have actually been the most constrained as we go through this. So I think largely, there's a few different factors that go into it. And that comes along with product portfolios. So different types of products we're introducing at different times will have an impact on that for sure. And I think we can do a lot more than the 12.6 that we mentioned at the end of last quarter. The number I look at is the 116 million homes that, even in existing categories, today that we think we can address. And so, that's what we're very focused on and how we reach those. And we balance that and balance our product road map with thinking about how we attract those homes and then how as well we're adding to the lifetime value of the existing homes. And so, those are the things that we're looking at. We continue to think about different levers. One of the things we didn't do, as you heard from Brittany in Q1 is a promotion, either. And so that's often helpful in terms of new home driver as well. But I think it really comes back to some of the supply front. And then keeping in mind, we have doubled the number since 2017. And I think we'll continue to be able to do that. And as always, we'll update on the new homes at the end of the fiscal year.

Okay. And then, can I follow up with a question of Brittany on the just kind of inventory levels. I know they're depleted now. But I wonder, is it reasonable to think Brittany, that channel inventory is kind of back to a normal level by the time we get to the fall, or do you think that's unreasonable, given where we are with supplies?

Getting out my crystal ball. I think we'll certainly be in a better position from general inventory as we get to the fall. I don't know if it will be fully back at normal levels, but we do see it improving from where we are today. So knowing what I know, I would say it improves, but it's not sort of like magically all better at that point.

Okay, great. Thanks a lot.

Thank you.

Your next question comes from the line of Erik Woodring with Morgan Stanley. Your line is now open.

Thank you and congrats on the quarter, guys. Obviously, really strong gross margin performance. And obviously, you went through some of the puts and takes. Any way you can kind of frame the impact of which had the most significant impact, channel mix, promotions, product mix, logistics? Just trying to understand what was the bigger factor in driving the better performance? And then I have a follow-up. Thanks.

Yes. I think that we called out that the impact from product mix and channel mix have been lessening as we look at this year and that in Q1, the impact from not having promotions was a pretty big driver for us. So you look at the promotion, lack of promotions, you look at the price increases and we're more than sort of offsetting the cost increases and challenges from a price standpoint that we see in the supply chain.

All right. And then maybe I'll direct my follow-up at Eddie, give Eddie a chance. Any comments he can share on the ITC news from last month, what are the next signposts that we should be looking for either in the US or internationally as it comes to legal action? Thanks.

Well, thank you. So we were certainly pleased to see that the ITC affirmed the administrative law judge's ruling that Google infringed all five of the patents that we had an issue in the case and issued a limited importation ban that we expect to go into effect on March 8. So we're certainly looking forward to that moment. And we do have a case quite active in Northern California against Google based on a second generation of Sonos innovations that is moving forward at this time. That's really where the action is right now, and we'll see how things play out.

Thanks, Eddie. Congrats again, guys.

Thanks, Erik.

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

Good evening good afternoon. Overall, I guess I was wondering if you could talk a bit about labor costs. Obviously, this is something that we're seeing a bit more these days than has been the case over the last number of years. And so could you just talk about the extent to which you're seeing inflation there? And also, if it is material, what you are doing to ensure it doesn't weigh too heavily on results?

Yes. I would say, we see similar trends as sort of the rest of the market broadly and have factored all of that into our guidance as we look at the year.

Okay. And then just on R&D, spending was up a decent bit year-over-year, albeit largely in line with where you were last quarter. Can you talk a bit more broadly about where that investment is going?

Yes. Obviously, we spend a bit of time talking about product road map and how excited we are to have a strong product road map, not just for this year, but in the future and continuing deliver on that two product a year cadence. And beyond that sort of two hardware product a year that people focus on, we are continuously updating our software, our app, our user experience, bringing new things like Sonos Radio. So we just really continue to invest in the customer experience and the product road map and that future of our business. And so we've talked for the last, gosh, a couple of quarters at least about how continuing to invest in R&D and the product road map is something you're really going to be seeing from us. And again, not a big deal quarter-over-quarter. So you're seeing it a bit more year-over-year. So you're just seeing the impact of those investments we've been talking about and have been making.

Okay. Thank you.

Your next question comes from the line of Victoria James with D.A. Davidson. Your line is now open.

Thanks for taking my call. I've got just the one question based off of a comment that Brittany just made regarding the software app user experience stuff. Is there anything that you can tell us at a high level about the anticipated mix of services to product revenue going forward?

We don't have anything we're going to be breaking out on that at this point. I can say that we've talked about Sonos Radio in the past. It continues to be the third most listen to service. It's the fastest growing service. So we're very happy with the consumer experience we're delivering through some of these investments. And when it gets material, we'll start breaking it out financially, but that's not at this point.

Thank you.

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

Great. Thank you, and thanks, everybody, for joining us. We appreciate it and look forward to talking to you next quarter. Thank you.

This concludes today's conference call. Thank you for attending. You may now disconnect.