Good afternoon. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to Sonos Fourth Quarter and Fiscal 2023 Conference Call. [Operator Instructions] I will now like to turn the conference over to James Baglanis, Head of Investor Relations. James, you may begin.

Thanks, Krista. Good afternoon, and welcome to Sonos Fourth Quarter and Fiscal 2023 Earnings Conference Call. I'm 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 new Sonos Radio HD exclusive station, Lazy Day Country. 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 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 2023 results posted to the Investor Relations portion of our website. As a reminder, the press release, supplemental earnings presentation and conference call transcript is available on our Investor Relations website, investors.sonos.com. I would like to also note that for convenience, we have separately posted an investor presentation to our Investor Relations website, which contains certain portions of our supplemental earnings presentation. I will now turn the call over to Patrick.

Thank you, James, and hello, everyone. Earlier today, we announced our Q4 and fiscal 2023 results, which came in roughly in line with the midpoint of our guidance for revenue and adjusted EBITDA. Revenue of $1.66 billion was down 6% year-over-year or down 3% excluding foreign exchange and adjusted EBITDA was $154 million. While our business is more resilient than many of our competitors, thanks to our strong brand and loyal customer base, it was a challenging year in the categories in which we play today. The good news is that we've retained strong market share positions in the countries we play despite our competitors offering deep discounts throughout the year. In fact, we recorded our highest market share in home theater in both the United States and Germany this year since 2019. This is a testament to the strength of our brand, our product portfolio and the execution of our team. We know we're in a down part of the business cycle when it comes to home audio, and we know that eventually, consumers will return. There are strong secular trends that will help drive our business over the long term. Work from home is going to be an enduring phenomenon, so too will be increased home consumption of video content. And as the touring success of Taylor Swift and Beyoncé attest, music and the joy it brings remains an essential and thriving part of our culture. Sonos benefits from all of this. In fiscal 2023, we once again proved that we're willing to make necessary changes towards driving sustainable profitable growth. We made the difficult decision to rightsize our expense base in mid-June when we conducted a 7% reduction in force and substantially reduced our real estate footprint. I am confident that we are investing at the right…

Thank you, Patrick, and hello, everyone. As Patrick observed, we finished the year characterized by 3 things: first, softening consumer demand in our categories as we work through economic transitions following the pandemic. Second, important improvements in our product lineup that will serve us for years to come. And third, a tight focus on costs to match the softer demand environment. Turning to the numbers. Fiscal 2023 revenues were $1.66 billion, a year-over-year decline of 3.3% constant currency and 5.5% reported. Foreign exchange was a $39 million headwind to revenue and a very significant portion of that headwind flowed through to reduce gross profit and adjusted EBITDA. Product registrations, which reflect consumer demand, grew 5% year-over-year, whereas products sold, which reflects sales to our retailers and installers and our DTC channel declined 9% year-over-year. The variance between these 2 figures represents the reduction in channel inventory levels that we saw across both the retailer and installer channels. This reduction puts us in a healthy channel inventory position across our channels and geographies as we enter the holiday season. Products sold declined by more than revenue on a percentage basis due to a 4% increase in revenue per product sold. This increase resulted from some price increases and favorable product mix, partially offset by increased promotional activity and FX headwinds. Performance varies significantly on a regional basis. Revenue in the Americas was up slightly year-over-year which continued our unbroken streak of increasing revenue every year in the Americas since we went public in 2018. By contrast, revenue in EMEA declined 10% and in APAC 32% year-over-year. The softer performance in EMEA and APAC relative to the Americas reflects the particularly difficult macroeconomic environment affecting those regions, which impacted both retailer sell-in and run rate registration trend. On a channel basis, retail…

[Operator Instructions] Your first question comes from the line of Tom Forte from D.A. Davidson.

So Patrick and Eddie, thank you for the thoughtful comments as always. I have 2 quick initial questions and then one quick follow-up. So my first 2 quick ones, are you seeing disproportionate numbers in your sales for lower-priced items? And then how are consumers responding to your promotions?

So Tom, we're not seeing anything special at the low end. In fact, the average sales price of our products went up 4% this year, year-over-year, and it has gone up significantly the year before as well. So we're seeing the premiumness is working for us. And remind me the second question, Tom, sorry.

Yes. So thank you for that, Eddie. So how are consumers responding to your promotions?

Promotions. Yes, there are responding -- the consumer is definitely looking for promotions. There's just no doubt about that. We've seen overperformance in the fourth quarter, and that was one of the things that hit our gross margin, and we've taken that into account in computing our guide for fiscal '24.

Great. And then my second follow-up question. What data points are you looking at to gauge future demand, such as housing starts or anything else? I think the challenge for everyone right now in consumer electronics is to try to determine when the demand returns. I'm curious what high-level data points you're looking at?

Yes. Tom, you're exactly right. I mean, I think that is the challenge for everybody. And I think having been in this cycle for about a year now, we're just being very prudent about how we look at our business and what we're hearing from our channels, how we're planning as we go through it. And so we're looking at all the data points that you probably look at. But at the same time, I think we really -- before we would say things are normalizing, we'd want to see it in our actual numbers. And that's going to be our approach for right now is -- as you heard from us, we have been prudent and assumed that the environment we've seen in '23 will continue. And until we start to see something different in our categories, or our results, we won't change our perspective on that.

Your next question comes from the line of Steve Frankel from Rosenblatt.

Let me just backtrack for one minute. And could you repeat the Q1 revenue guidance. Are you saying -- just remind me again exactly what you're saying there in terms of...

The revenue guidance -- right. So the revenue for Q1, we expect to be up sequentially from Q4, 90% to 100%, which is -- reflects kind of typical seasonality between Q4 and Q1.

Okay. Great. And then given what's going on with the consumer and what your partners like Best Buy are doing in terms of inventory. Are you contemplating doing anything different in '24 to drive more business to your DTC channel?

No. I mean we -- the one thing we've been working on, Steve, is we do experiment with the -- what we're trying to do on our customer relationship management through our DTC. So trying to tap into that $6 billion opportunity with our existing customers. We have a team that is focused on trying to tap into that group and experimenting with a variety of offers and information and reach out and some of these things. And so there are activities there that will be occurring during the year to try and accelerate repurchase, if you will. So there is something -- there's always things that we're doing in DTC, I would say, that are experiments to see how we might drive sales, particularly with our existing base. And then we'll usually take those learnings and share those with some of our large retail partners as we go through it. But we believe there continues to be opportunity in every channel, and we have a plan with each of our partners and in DTC that attempts to drive growth as well. So we certainly don't see it as trading off from one channel to the other.

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

Awesome. Patrick, maybe if we start and take a step back, it's clear that your flywheel was still working last year, right? You saw your kind of important installed base metrics grow again year-over-year, some of them on an absolute basis accelerated. But revenue was down obviously and is expected to be flat next year. So maybe my question is how should we pair those 2 dynamics together? The flywheel is working, but it's not translating into growth. What changes that?

Yes. And I think this is -- it gets to the fact that we also held a strong market share position despite in our categories, sales overall being down 10% to 20% year-over-year. And so -- and that's with tons of discounting by our competition as well and consistently throughout the year, pretty unprecedented from everything that I've seen. And so the fact that we can hold our own in an environment like that, the model continues to work, we have people come back, if anything, that part of the flywheel where we have existing customers returning to purchase helps us in a period like this because that is different than most consumer electronics company and creates revenue that helps make sure that we can work through this period. And then, Erik, I think through both the combination of the new product categories that we're going into, plus consumers coming back to purchasing audio products, electronics as we go into that, I think will allow us to get back to where we want to be from a growth perspective overall on the revenue front. And so I think it's one of those periods. We obviously had upcycle the previous couple of years, and now we've had a challenging '23, and we're going to be prudent in how we look at '24 given what we've seen over the last year. And -- but I also know, having been at this for a long time, that these things are cyclical, and we will see people coming back to the category, and we are going to be in an excellent position when they do. And in the meantime, we're also going to focus on going into new categories that present new opportunities with new customers, and we know that those customers will come back and purchase more products too. And so I think those things combined will put us in a good position to return to growth.

Okay. No, that's awesome. And then, Patrick, you also made the comment that we're kind of sitting ahead of a multiyear product cycle. Would just love for you to expand on why you believe that is.

That's -- that really is a result of the investments we've been making the last few years. And so I talked about last year at this time, the fact we're going to 4 new categories. We went into one last year, which was Sonos Pro, which is more of a slow build in terms of that one, but a big opportunity for us long term. The one we'll get into this year has more immediate benefits to our business in terms of we go through that. And so we have more coming, and we feel like we're in a good position now where we will be able to leverage those entries into new categories to drive good growth in each of the fiscal years ahead. And so that's something that we're very excited about. We know it's difficult on your side to model for things you don't know about like our road map, and we felt it was important this year to give an indication of the new category we will be entering as it's quite material to what we're laying out for fiscal 2024. And -- but obviously, we don't get into the road map on a TikTok basis, but it's something that we've been investing in, and we feel it's going to help us as we try to drive that kind of consistent growth every year.

Okay. That's helpful. And maybe just a quick follow-up on that. You've never necessarily shared that $100 million new product contribution type of metric historically. Just curious if you can give us any color on maybe how that compares to past years just to help us gauge how truly important you believe this new product and kind of new market could be for you. And that's it for me.

Thanks, Erik. This category is a multibillion-dollar category. So we're super excited about it and super excited for what we have planned. The team has been doing a great job. Every category is a little different in terms of where we've been, timing, the existing customer base we have and all of those things. And so we wanted to just give people an idea of the kind of impact they could expect from this year. And so -- we're super excited about it and looking forward to this category and the ones we have to follow as well.

Your next question comes from the line of Jason Haas from Bank of America.

I'm curious if this recent unfavorable ruling changes your litigation strategy at all, if it will have any impact on future court cases if there's any implications from this?

It doesn't change our strategy. We -- the judge in Northern California adopted what we think is a legal doctrine that bears -- that simply doesn't bear on our case and that the facts that he brought to bear to support the ruling aren't inaccurate. And so we intend to appeal. We feel very strongly that we have a good chance on appeal. So it doesn't otherwise affect our strategy. It also doesn't have implications for our other cases. The next big damages case that we'll be teeing up in California in a different court involves 5 completely different patents. So there's just no overlap in either doctrinally or in terms of the patents. So we're just full steam ahead on the current strategy.

Got it. That's good to hear. And then as my follow-up, I'm curious if you could talk about where you think your share gains are coming from because you mentioned, I think it's been a few quarters now, you mentioned that competitors have been very promotional. So it's good to see in light of that you picked up share. So yes, I'm just curious if you had any sense of where those are coming from?

Yes. I mean, I would say home theater has been a particularly strong part, and I think that's a testament to our portfolio. You'll recall we haven't introduced anything new in home theater over the last year despite some of our competitors doing so. So I think it just speaks to the quality of our product portfolio and the execution by our team at retail, our DTC team and making sure that we're making it clear why our products in that category are better than the others that are out there, leveraging, so great communications, marketing, go-to-market efforts around those kind of things. And then our strong customer base that speaks loudly to their friends and family about the quality of Sonos products. And I -- we've been believers in this model for 18 years. We've seen the power of it. And I think in challenging times, even you see the power of it because we haven't had to discount like so many across the industry have and we've held up well. And so I think it comes from building a strong loyal customer base with a great innovative product portfolio over 18 years.

Your next question comes from the line of Alex Fuhrman from Craig-Hallum Capital Group.

It looks like the repeat customer metrics were really strong and seeing nice growth in the number of units owned per customer. Curious if you're seeing Move 2 helping to bring in new customers as you were expecting to after that came out? And then just thinking about the new category that you plan on entering later this fiscal year. Do you think that's something that's really going to be appealing more to new customers? Or do you see that more as a natural extension to your existing customers?

Yes. Thanks, Alex. I think the thing I'm always -- what would I say, so pleased with in every product launch is how strong the turnout from our existing customers is ultimately for whatever product is that we're building and bringing to the world. And we have a very strong following that follow -- so Move 2, lots of existing customers coming in and purchasing that product and kind of in line with what we'd expect for new. And as we enter these categories, we certainly expect that existing customers will go out and buy products, maybe multiple. And then over time, we expect any of the products that we're working on to help bring new customers into the Sonos ecosystem. And that's what we typically see through everything that we build. And so we have our eye on trying to achieve kind of both of those things that usually phases where we'll see the existing quickly jump on it, add it to their collection and then we'll start to bring in new. And as you know, we have a long product life as well. So I think it works very well from a return on investment perspective, too.

[Operator Instructions] Your next question comes from the line of Jake Norton from Raymond James.

I just wanted to double-click on what is the internal thinking on product philosophy -- or product velocity and a number of product launches for fiscal '24? And then further, how should we think about when is the right time to get marketing dollars behind Sonos Pro and drive up customer awareness?

Yes. So no changes to our at least 2 new products every year as we think about what it is that we're building. And as we've laid out and why we wanted to give some indication, this year, we happen to be entering a very large multibillion-dollar category. So I wanted to give a little color on that, but the overall philosophy remains trying to introduce at least 2 new products every year. Fiscal '23 was definitely a year of raising the bar in existing categories and fiscal '24 is a story of entering new categories, which we're very excited about. On the Sonos Pro front, we continue to see good traction in the companies that we're in today. And we're doing some things in our IT side to make it easier for customers to be able to sign up for that service. And I think as we do that and we learn if we've got that right, then we can pour some gas on that fire and take it from there. So that's kind of the way we're thinking about that. We've got lots of plans and exciting ideas of how we do more in Sonos Pro,, so stay tuned for that over time.

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

This is David Lustberg on for Brent. 2, if I may. Maybe to start, could you just walk through your expectations for promotions this holiday quarter and how that level of promotion compares to prior years? I know you guys have pointed to deeper discounts at your competitors. So just curious how you're thinking about being competitive on price this holiday season.

So we aren't going to change our philosophy, which is really around promotional moments as opposed to being on promotion all the time. But this -- the holiday season is the time for that. I mean Black Friday, Cyber Monday is a crucial component of the quarter, and we are going to be putting out some very interesting and compelling offerings during that period. And so I don't think you're going to see a significant departure from past practice, but we've always promoted during this period, and we will do so again.

Got it. That's helpful. And then maybe to follow up, I don't know how much visibility you guys have here, but it looks like you guys did about $33 million in legal and transaction-related costs this year, which is roughly up 50% from last year, I think, primarily related to the Google litigation. Is there any color that you provide or you can provide that you have visibility into what that expense could look like in '24 as you guys keep on the gas as it relates to the Google litigation?

We would expect it to be very, very significantly lower. Last year was an unusual year in that we had multiple trials including 2 that we had to prepare for at the ITC, only one of which, turned out, went forward, plus the trial in Northern California, which was very hotly contested. We don't have anything comparable to that on the map for '24. So at least as things stand at the moment, I would expect the expense to go down very dramatically.

We have no further questions in our queue at this time. I will now turn the call over to Patrick Spence for closing remarks.

Thanks, Krista. And just 3 quick things from my end. First, we are at the beginning of a multiyear product cycle. We have a product road map that builds on the success you have seen thus far, growing products per household and revenue per product. As you'll see from the new cohort data we released today in the earnings slides, our flywheel is real and the lifetime value of our cohorts continues to build over time. This gets turbocharged when we enter new categories, starting with the one we enter in the second half of fiscal 2024. The runway to continue to monetize our installed base is very long. Second, while the environment remains challenging, our market share performance shows that we are holding our own. Our innovation, brand and product portfolio continue to enable us to lead this category without having to sacrifice margin the way all of our competitors have. We are well positioned to accelerate revenue growth back to low double digits as our categories return to normal and these headwinds subside. And finally, we feel good about the size of the team we have now. We don't see a need to add a lot more people to deliver on our long-term growth objectives. As you saw from our actions in fiscal 2023, we are always managing and optimizing our expense base to ensure the business will deliver sustainable, profitable growth. We are confident we have a path to drive our EBITDA margins to our long-term target of 15% to 18%. Thank you for your time, and we look forward to updating you again next quarter.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.