Thank you for standing by. My name is Jale, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sonos First Quarter 2025 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. If you would like to ask questions during this time, simply press star followed by the number one on your telephone keypad. I would now like to turn the conference over to James Baglanis, Head of Investor Relations. You may begin.

Good afternoon, and welcome to Sonos' first quarter 2025 earnings conference call. I am James Baglanis, and with me today are Sonos' interim CEO, Tom Conrad, CFO, Saori Casey, and Chief Legal and Strategy Officer, Eddie Lazarus. For those who joined the call early, today's hold music is a sampling from the Sonos radio "Say it Loud," which is curated in collaboration with Black at Sonos in recognition of Black History Month. Before I hand it over to Tom, 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 first quarter results posted to the investor relations portion of our website. As a reminder, the press release, supplemental earnings presentation, including our guidance, and a conference call transcript will be available on our investor relations website investors.sonos.com. I will now turn the call over to Tom.

Thank you, James, and thank you all for joining us today. I'm now in my fourth week as interim CEO. It's still early days, but not too soon to make a few observations. First, we have a lot of work to do. Despite recent progress, our core experience still needs significant improvement. Second, we must continue our effort to bring our expenses in line with our revenue. And third, I'm more convinced than ever that Sonos has a large market opportunity ahead of us, both in its current categories and in close adjacencies, and I know that we have the best team in the world to seize this opportunity. We're moving quickly and with purpose across all these interrelated fronts. As a board member, I started working closely with our software team this past fall, and I can tell you that they have an absolute dedication to improving the Sonos experience to a place that exceeds the expectations of all of our customers. I'm all in on reinvigorating and accelerating this essential work, helping with focus and priorities as we tackle what are frankly some very complex and longstanding software problems. As a longtime passionate customer myself, I know the magic of Sonos, but I also know the extreme disappointment of the company's recent app challenges. With respect to our expense base, I'm closely partnering with our CFO, Saori Casey, to drive operational efficiency and improve our financial performance. To accomplish this, I'm returning Sonos to a scrappier and more focused enterprise, drawing on the lessons I've learned from the successes and challenges I've navigated at companies of all stripes for over thirty years, from Apple to Pandora to Snapchat to Quibi. To this end, yesterday, we executed on a set of significant changes to the way we have reorganized…

Thank you, Tom. Hi, everyone. We delivered Q1 revenue towards the high end of our guidance at $551 million. On a year-over-year basis, revenue was down 10% versus our guidance of down 22% to down 9%. The decline was driven by softer demand due to market conditions and challenges resulting from our 2024 app rollout. As we've been talking about for some time now, our categories remain cyclically challenged and highly promotional. This was particularly notable in our portables category. Despite these headwinds, we saw stronger than expected demand for our new industry-leading soundbar, the Arc Ultra, which helped us achieve our highest ever quarterly market share in US home theater on a dollar basis. GAAP gross margin was 43.8%, plus 80 basis points above the high end of our guidance range, driven by better cost and product mix. As a reminder, we began amortizing the MIGHT intangible assets now that we're using its sound motion technology in Arc Ultra, which was a minus 40 basis point headwind year over year to GAAP gross margins. Non-GAAP gross margins were 44.7%. Q1 GAAP operating expenses were $193 million, and non-GAAP operating expenses were $169 million, down 5% and down 6% year over year, respectively. Both figures include $6 million of app recovery investments in the quarter. Non-GAAP operating expenses came in about $13 million below our guidance, due to both expense management efforts and timing of spend. Speaking of expense management, last quarter, I spoke about how we had begun our transformation efforts last year with our G&A functions. As a result, this quarter, we saw GAAP G&A expense decrease significantly to $25.8 million, down 35% year over year. This decline is attributable to four factors: one, lower personnel costs from the August 2024 reduction in force; second, lower litigation expenses;…

Thank you. The floor is now open for questions. If you would like to withdraw your questions, simply press star one again. If you are called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Your first question comes from the line of Steve Frankel of Rosenblatt. Your line is open.

Good afternoon. Tom, the release today was a bit unconventional. The numbers out before they open, and then the call happened this afternoon. What drove that behavior?

Let me start by apologizing for the unconventional nature of this timing and take you through a little bit about how we ended up there. I've been here for three and a half weeks now, and I'm working to move the company forward quickly and with purpose. We've made a set of organizational optimizations. The related cost savings were among my top priorities coming in the door, which meant that the timing of the reorganization announcement and the earnings was sort of a delicate matter. I had to balance effectively communicating these complicated changes involving around two hundred departing colleagues and nearly a thousand product team members being reorganized with my responsibilities around the call. I decided that the best course was to announce the reorganization and related rift the market closed yesterday and a day ahead of earnings, which gave me the time late yesterday to land these changes with the team. To minimize uncertainty with our investors today, we moved the release timing to before the market open. We left the timing of the earnings call itself intact because it had been announced before I arrived, and we thought it would be too disruptive to move it. Thank you for your understanding about the late-breaking shifts to all of this.

Thank you for the insight. Maybe. Give us the top two or three most important changes you think the company has to make going forward?

You know, as I said, I have a pretty strong bias to action. And in my first three and a half weeks, we've reorganized the company into a far more efficient structure. We've made concrete progress on rightsizing our expense base. We clarified our areas of focus to get the entire company rowing together in the same direction, which really sets us all up to begin operating the company much more efficiently and with a much more shared, stronger sense of purpose. My focus now is getting Sonos back on track, which means improving the core experience for our customers, optimizing our business to drive innovation, and delivering operational and financial performance.

Okay. And you know, the last quarter and the message was the app was almost there. Where do we think we are today and how much longer is it gonna take to get both the iOS and the Android experience where they need to be to kinda restore the brand?

So the team certainly made a lot of progress in Q4, and that allowed us to successfully launch Arc Ultra and Sub four, both of which are a hit with both customers and reviewers. And now I would say that the team and I are just really focused on what I would call a return to excellence in the core experience, kind of having moved beyond getting the app back to the place that we needed its core functionality to be. But, honestly, there remains a lot of work to do to meet my bar. And so we're focusing on three areas: performance and reliability, usability and design, and new experiences.

Okay. And any timetable for when you think you'll be satisfied?

I mean, at some level as a product and engineer, great companies are continuing to invest in improving the experience day in and day out. And put most of the work that we have in front of us in exactly that category.

Okay. And then one last quick one. Where are channel inventories today, and how does that square with the desired level?

I can take that question. We ended the channel inventory at a comfortable place at the end of Q1. As you recall, last year, we were in a different place. So we're pleased with where we ended the quarter going into Q2.

Okay. Thank you. I'll go back into the queue.

Next question comes from the line of Logan Katzman of Raymond James. Your line is open.

Hi, guys. This is Logan on for Adam. Just two quick ones for me. Tom, maybe first for you. With all the changes you're implementing, can we still expect two product launches a year? Or has that been put on pause?

We're certainly committed to continuing to ship many great products each year. I think I'm probably gonna hold off on making specific commitments about the product roadmap.

Yeah. Makes sense. Thank you. And then just one last question from me. Any changes to capital allocation or anything that you guys wanna talk about around that?

I can take that question. We continue to focus on our capital allocation strategy. As you recall, we did pause the buyback in Q4 while we were focused on the app recovery progress to make sure that it was stable enough. But we have resumed the buyback, as we mentioned, and we continue to be judicious about our capital allocation, and returning capital to our shareholders remains a pillar of our strategy.

Great. Thanks, guys.

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

Great. Thank you so much for taking my question. And nice to meet you, Tom. You know, in the letter you sent to employees yesterday, you referenced Sonos becoming mired in too many layers that have made collaboration and decision-making harder than it needs to be. Can you maybe just expand upon exactly what you mean by that and help us understand how the actions you're taking are gonna help on the product front or if it's more beyond the product front? Just help us understand what exactly you mean by that, and then I have a quick follow-up. Thank you.

Sure. So the product organization in particular had a sort of business unit organization strategy where there were separate organizations for different elements of our product line, a professional category, a portable category, a home category, and so on. And what that meant is we had a bunch of kind of redundancies across those teams. We had a head of mechanical engineering, for example, in each one and team members underneath that. As we seek to have flexibility in the way that we apply our resources to our roadmap, having that particular set of products hard-coded into the organizational structure just creates a lot of overhead and a lack of flexibility around being able to react and adapt to market conditions. And so by moving to a functional organization with a hardware team and a software team and an operations team and a design team and a QA team, that allows us to sort of put together what I would call right-sized projects that have the sort of minimal powerful set of people that need to come together to address some particular market opportunity. And it just lets us move more quickly, and it gets us collaborating much more efficiently. And that's what I was alluding to in the email yesterday.

Okay. No. No. That's helpful. And maybe now I have a different follow-up, which is just, you know, if I could maybe double-click on that, it seems like that's been the kind of the Sonos MO for years, if not decades now. So I guess what has really changed now? I mean, you've been on the board, I guess. I'm just wondering why make the change now if, you know, if we look back beyond maybe the last three years, you guys were going through, you know, multiple years of 10% growth. Obviously, it's been a very challenging market, but you've had that structure while you were successful. So why is that not the successful structure going forward? Or is this really just about making sure you know, you're being more efficient going forward?

Yeah. Actually, the business unit structure was put into place about eighteen months ago, replacing a sort of what I would call a semi-functional model that was, I guess I would describe it as hardware top-heavy in its previous incarnation. Where the encoded in the hardware organization were some of these same more product line dimensions, but the hardware group was complemented by a functional group for software and a functional group for design, for example. So what we're doing here is in a way, a return to form that worked so well for us. But also, I think we're further refining the model, pulling out the idea that everything we do has to start with a hardware new product. Which would allow us, I think, to navigate much more not just efficiently, but effectively with respect to the kinds of core experience initiatives that our customers care about.

Okay. Look. That makes a ton of sense. And thank you for that clarifying. Super helpful. And then, you know, last question for me, Saori. I know you don't guide beyond the quarter out. If you look and I appreciate the comments you made on the product launch last June quarter. If you look back in history and just exclude the June 24 quarter, your seasonality in fiscal Q3, revenue seasonality has been anywhere between down 7% sequentially and up 42% sequentially. It just leaves a very wide range for consensus to fall in. I'm just wondering if you have any comments to help us on the call, kind of make sure that we're thinking about just where maybe what years we could look to in history to maybe set the proper bar for the June quarter. Realize there's a lot of moving pieces, but just wondering if we could have any more detail to just kind of maybe help us narrow the scope of how we should be thinking about the June quarter. And that's it for me. Thank you.

Hi, Erik. Thanks for that question. It certainly is challenging even if I was looking back if there was a pattern there. And to your point, there's a wide range. At this point, we were only able to provide color relative to last year's view that the pattern will look different than last year as a result of the Ace launch and the channel fill we had at the end of the quarter. So we're leaving it at that at this point, exactly to your point, there is not a great pattern on a sequential basis going into Q3. So thank you.

Okay. I understand. Thank you so much, Saori.

Your next question comes from the line of Alex Fuhrman of Craig Hallum. Your line is open.

Hey, guys. Thanks very much for taking my question. You know, wanted to ask about the workforce reduction and just, you know, more broadly, if you think about kind of the company going forward being a leaner, more streamlined operation. How much of the organization today is focused on hardware development versus software development versus things like sales and marketing? Can you give us a sense of just the biggest shifts in how the company is different today than how it was just a year ago?

I'll start by talking about the product organization. So I think that so much of what we do that people perceive as hardware is actually software. And so our software organization is today, in fact, quite a bit larger than our hardware organization. I think the rough numbers are hardware is around 150 people and software is more than double that. Of course, we have a talented team around design, QA, operations, and so forth that complements all of that in our product organization. Saori, do you want to talk to how that relates to our...

Yeah. Just from a if you look at our OpEx, you'll see the ratio among just on a dollar basis among R&D, sales and marketing, and G&A. There are cyclicality to the marketing spend for holiday seasons and so forth. So, you know, just in general, in aggregate, but from a headcount perspective, the biggest part of the company by far is R&D headcount. And then there's G&A headcount and then sales and marketing headcount. Marketing would have a big part of the expenses related to the non-headcount dollars with G&A more leaning towards the headcount dollars as is for R&D. So probably best to look at this on a dollar basis because of the way we spend the operating expenses and the investments, but that's sort of the general lineup in relative terms in terms of headcount resources.

Okay. That's really helpful. And then, Saori, I think you'd mentioned some kind of baseline OpEx numbers from this year. Should we be thinking about the opportunity for a step function lower in the future in OpEx, or is it maybe more about an opportunity to just be growing sales faster than expenses in future years? Can you help us understand that?

Thanks for that question. While we've announced these reduction in force, specifically around the headcount, we're continuing to look at a lot of the cost optimization opportunities. I know we've been a little less concrete about what it means by changing cost structures, but it really is looking at every dollar and how we're able to spend that dollar in a more efficient way. In fact, that could be anywhere from real estate footprint that may or may not be effective in producing and helping our better best return for the investments all the way to negotiating better fees and so forth. So it is beyond headcount that we're looking at as we continue to go through our transformation process. And so it's sort of a journey than what we've already announced so far. We're not announcing any guidance on OpEx beyond what we're providing today. But we are continuing to look at this to make sure that there are still opportunities, as we said on the earnings on the prepared remarks, that there are still opportunities that we can continue to drive for.

I'll just add that if you look at my background, you're gonna see a lot of instances where I've helped take young sort of startup companies through their growth phase and into being newly public. And one of the muscles that you really develop in that process is learning to scrutinize all expenses as they come through, and I'm really particularly focused on making sure that we're making investments where we'll see the highest possible returns.

Okay. That's really helpful. Thank you both.

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

Thanks. Tom, just on the 12% reduction in force, can you discuss, you know, was that kind of across all functional areas? Was it focused on a couple bigger areas? And perhaps you could discuss some of the changes that you made in the software development team. Have you made changes in leadership? What are you doing there to get those experiences back so we as all consumers have a cleaner, simpler experience?

Yeah. So a lot of great work had been done by Saori to bring our operating expenses in line in the G&A lane in previous quarters. This set of changes was really focused on the remaining dimensions of the company with a particular emphasis on changes in the product organization. As I've described, the reorganization itself revealed significant redundancies across the product organization and opportunities for us to step into a smaller but more effective team. Another thing that kind of comes from having spent a chunk of my career in startup land, you often discover that the size of the team is not highly correlated with the output of the team, and we've done a really great job, I think, over the course of this recent period of sorting a path to making the product and engineering smaller but more efficient and more powerful. I'm really confident that we have the right team in place to deliver on the enhancements to the core experience that I'm so committed to.

Okay. And just on the software side, have you made changes in that leadership team to ensure they're on the right track?

That's right. So across the product organization, we exited about half a dozen vice presidents and reorganized teams around our most effective leadership for the go-forward plan. It's a great group. I know we're gonna make lots of progress.

Okay. Great. Thanks.

We have a follow-up question from the line of Steve Frankel of Rosenblatt. Your line is open.

I just wondered if you might give us any color on how Ace did in the important holiday season.

Hi, Steve. You know, from a revenue results perspective, certainly Ace was incremental to our year over year and to our quarter, and it continues to get great reviews from our customers. And as we mentioned on our earnings call, it was off to a slow start. And so as we continue to go through the recovery of our brand, certainly, you know, Ace launched at the worst time possible from an app launch timing perspective, and so we're certainly making progress. And we're not able to disclose exact results as we disclose the categories that we do externally, but we're pleased to have Ace being a great review from our customers and incremental to our revenue.

Alright. Thank you.

With no further questions, that concludes our Q&A session. The conference call. We thank you for your attendance. You may now disconnect.