Sonos, Inc. (SONO) Earnings Call Transcript & Summary

Yes. So we filed 2 claims based on 5 patents. The 5 patents really are around the multi-room home audio and the synchronization involved pin that, which is a pretty complex problem that we solved well ahead of anyone else. Our 2 claims, one is in the ITC. The ITC has officially accepted our lawsuit. So they are going to look at it. And from precedent cases, they usually make those decisions inside of 18 months. So a lot of the questions we've gotten are -- isn't this going to drag on forever? Part of filing in the ITC, so that we reach a more rapid conclusion. The ITC has the power to block infringing products from importation. So if we win in the ITC, that's a pretty big win for us. We also filed in federal court. Federal court can take longer, but they're really responsible for assigning the damages that would be awarded in either willful or just regular IP infringement. As you can imagine, suing Google was not our first choice in terms of how to go about this. So we tried pretty hard for a very long time to have a different type of discussion with them. As you can imagine, they don't have a lot to lose from forcing us to go sue them. And so that is the path that we have headed down, and we take it really seriously. And we, obviously, wouldn't have done it if we didn't think that we had a good case. So we contemplated and decided that we weren't insane and that this was the right next step forward. Yes, other companies have infringed on that IP. I think our general counsel even talked about that on our last earnings call, but there is always a relative magnitude, there's where you are in your conversations and there's how many things you want to bite off at one time.

And do you think -- I mean, let's say that we don't know how that will go, but let's say it goes in your favor, does that become kind of a I guess landmark leverage point for you with some of these other conversations? Is that the idea behind this? Or how do you think about the strategy here?

Yes. I mean I think it's safe to say that people are watching both the fact that we were willing to go to the lawsuit stage just as a sign of how serious we are about protecting our IP. And then I'm sure they will be watching the outcome of that trial. So we will factor both of those in as we go along.

Okay. Let's talk about Snips a little bit, the acquisition Snips, something that, by the way, all the geeky Reddit groups, home automation groups that I happen to frequent, are upset about it, especially a particular project called Home Assistant. But I'm just wondering, strategically, why you think that makes sense? It seems like these voice platforms have a certain momentum of their own. And Snips is, I mean, an open-source-type platform, but does it make sense to go down the road of -- just talk, if at all, how you're thinking about that? How does it fit into all these other voices assistants?

Yes. So if you look at the way voice assistants get used, the 3 most frequent things that people do with their voice assistants is they ask it to play music, they set timers, and they ask about the weather. But the ask-anything voice assistants do so many things and they focus their capabilities on being good at everything. And so what we have seen in our data is that our customers are not particularly happy with their voice agent experience in terms of playing music. It gets confused. It thinks you want to do one thing when really what you were saying was the name of the band. And so it's not always reading that context. And yet, consumer expectations continue to go up in terms of time to music. So when Sonos came out, it was amazing that you could go use an app to play all of your music anywhere, and now everyone was like nah, app? That's a lot of work. And so voice has become really critical in terms of getting people to play their music faster to get to exactly what they want to make it easy for them. And so we looked at that and we said, "We don't want to be an ask-anything voice assistant." it does not make sense for us to go out and compete with what Amazon and Google and some of the other platforms are doing from an ask-anything standpoint, but customer experience does really matter to us. And we think that we can make it a better customer experience, if all you want to do is use voice to play music on your platform. And that's a lot of what Snips was focusing on. Now they were also focusing on a bunch of other things that are not core to our mission and what we're delivering from an experience standpoint. And so yes, there's some chatter on Reddit about that. But we've really taken that team who is a bunch of incredibly smart machine learning and AI engineers based in Paris and focus them on what a voice experience for Sonos on the Sonos platform would look like. I think the other thing that's really important is privacy. Snips is incredibly focused on privacy. And what we have heard from a lot of our customers is some of them are absolutely fine with the level of privacy they have with Amazon and Google, some are not at all. And so we're really about customer choice. And that can be as many voice agents as you want to use, it can be just accessing your music, hopefully, in a private way. And then we're coming out with products that don't have microphones at all, if you just don't want people listening to the conversations in your house.

Good. Okay. Let's talk about new business ideas. You threw these analyzing things out on the earnings call, and we have -- we've got some ideas of what those might be, but we're not sure. So is there any more you could tell us about Sonos Flex and Sonos for Business, especially Business. It's hard to -- but I think Flex, too, is hard to kind of imagine what is you're thinking about there?

Yes. So I'll take both of them. Flex was a pilot program that we ran in the Netherlands, where we basically offered a bundle of Sonos speakers as a subscription instead of going out and buying it upfront. And we basically just wanted to see how many people would want to buy it as a subscription. We heard more and more that younger people and people who are renting are used to buying things as a subscription. Even when maybe the math of like do the valuation of how much it costs you to buy it versus rent it and what the payback period is, everyone in this room would do that as would I. But that's not always how people want to approach their buying habits at this point. They want more flexibility. And so we went out and tested that. And I would say we have been pretty happy with what we've seen in terms of getting in a different customer who might not have been our traditional Sonos customer, who might not have known they wanted Sonos and so we are talking about it a little bit because we're pleased with the early results and think that we'll probably do some more at least pilots and tests to go flow that out. The question for us, the appropriate challenge for us on that one is, "Fine, but at some point, is it going to be more than just a buy versus rent decision on the hardware." And I think the answer is it has to be yes, so we're still early, and we're still figuring that out. That said when you think about something like what we just went through on the legacy products. If people were renting and always constantly getting upgraded to the latest Sonos hardware, we wouldn't all be going through the legacy piece of this. So it's something we're thinking hard about. Sonos for business is very similar, but it's targeting small and medium businesses. What we found is, you can go to a bar, a restaurant, gym and see Sonos speakers there and people playing that music. And we did almost nothing to help them get their speakers. We didn't really sell it to them. We didn't help them set it up. And importantly, what we're trying to bundle into that one is legal licensing of music. So we partnered with some of the music services that do commercial licensing. A lot of those businesses don't even know that using their consumer's Spotify account isn't actually legal. And so we're working for -- at how we help them really get the right set of speakers into their small, medium business. That they get the right commercially licensed music. And again, similar to the consumer offering, we'll see what else is a real value proposition to them over time. But we're trying to provide support in a different way to buy for a market that we probably haven't paid enough attention to.

How many business locations are there? Like the homes, I guess, doesn't include the different locations, does it?

It does not. Well, our -- that's a good question. I think right now, a business location would be like registered as a household in our numbers.

Okay. So the 9 million includes those locations as well.

Yes. We just think it's somebody's home.

Somebody's home.

That happens to be playing music.

But it's really a bar?

Yes.

Okay. Partnership with IKEA. Seems to be going well. Products are selling well. It's a different business model for selling modules since it is home speaker systems. Could you just talk about how that module business is going? And now that you've seen some data, is it interesting to maybe expand the module business? Or is it strictly an IKEA thing maybe you want to keep doing?

Yes. We've been really pleased with the IKEA partnership. Those products launched in August and have been very successful, both from our perspective and IKEA's, so it's a lamp and a bookshelf speaker. We sell them a module, so it is a different business model for us, and then they do the design around the end speaker. And as you can imagine, it's actually getting us into a different customer. So a lot of what we're talking about is how Sonos signs new markets to go after different customers who wouldn't necessarily know they were the smart speaker or target customer for something like Sonos. So we've been really pleased with the type of new customers we're getting in. We have to give a lot of thought to where and how we would go, expand partnerships. We do also have a partnership with Sonance, that's a sort of outdoor installed speakers. So IKEA is not our only partnership, and we're really looking for where it makes sense for Sonos to go do those partnerships. IKEA was fantastic because they have geographic diversification. They care deeply about the home, which is where most of our speakers sit. They care about design, and they have customers who love IKEA and come back and buy over and over again, very much like a lot of our Sonos customers. So it's about finding those partners over time who really fit with our brand and our aspirations.

It sounds like you think of it more on a partner-by-partner basis than you do a module business and a module business model. Is that correct?

That's correct.

Okay. All right. I wanted to talk about the outdoor market a little bit. I mean you do have your first outdoor product out, but how big is that market? Do you think there is opportunity? I know you'll say there's opportunity beyond just the initial product. But how much of the market do you think Sonos could eventually address?

Yes. So our total addressable market right now, I'm sure you guys all have the same market data we do, but when we look at all of the products we're in, including outdoor, we think it's about a $20 billion addressable market. Outdoor did increase tad a bit, but I think one of the interesting things about outdoor for us is the type of speaker we released is not the type of speaker that was in the outdoor market before. So in some ways, we are reinventing the outdoor category. And so hopefully, that means we're both growing the category and taking share of the category. And that is a bit what we look for when we enter new markets, we look to do it in a way where Sonos has a clear value proposition. We're doing it in a way that is consistent with how we approach categories. We did that in the wireless speaker market. We did that in the soundbar market. We certainly did that in the submarket, and now we're looking to do that in outdoor. And then we've talked about how outdoor is really our first move outside the home.

All right. I'm going to ask you a bonus question. I know you'll know the answer to it. But because you're the CFO, and I'm sure you have these ideas. But when we looked at Sonos initially, we thought, "Oh my gosh! This thing has insane gross margins, better than Apple. It's a great product." And then in OpEx, all that nice gross margin is burned away. And there's a lot of distribution costs, sales and marketing costs in there. And the thing that's complex about all of it is this custom installer base. Can you just talk to us about that OpEx a little bit, and how you think about that? And is it an immovable object that's custom installer base and all that cost or -- yes, how much flexibility do you have within that, if you can talk about that?

Yes. It's not an immovable object at all. I think over the last 2 years, we got real leverage out of our sales and marketing organization, north of 800 basis points and really started to push the levers there. We're looking hard at customer acquisition cost, right? Because when we get a new customer in, we know that they, over time, tend to average out at 2.9 products. We're excited about what IKEA can do from a customer acquisition cost standpoint. We've had some public company costs as we've stood up G&A and really made sure that we are operating as we should for a public company. And so that has been part of that over the last couple of years, but long term, we would certainly expect to see leverage there. And then the biggest area that you see investment is really in R&D, and we are being very conscious about that because we've committed to at least in 2 new products a year. We've talked about how those could be hardware or more service-oriented products. And I think one of the things that's misunderstood about Sonos is we get pegged off as just a hardware company. We do have beautiful hardware, but the magic in a lot of ways is really in our software, and we continue to have big software investments to continue to innovate, to continue to lead and differentiate. 2/3 of our new investment in this year is really in software. So software is a heavy part of investment for us. And it's so that we can have the right long-term road map. I mean we're not just thinking about certainly not the next quarter. We really try and focus on the next year. But even beyond that, we try and focus on the next 3 to 5 years and how we really continue to be a leader in the space.

Yes. Loved those APIs. So questions in the audience? You've got more?

A question on the Google sue. Do you -- are you concerned at all that they might pull the Google Assistant feature from your speakers? And can they even do that? Like how does that -- is that an annual contract or how does that even work?

Yes. They certainly could. Obviously, they choose where they have their Google Assistant integrated. We have a good partnership with Google broadly. We're working very hard to keep that partnership going, but could they retaliate, they could. I'm sure that it would get looked at if they chose to retaliate against us because we're trying to protect our IP, though.

Other audience questions? We've got a couple of more minutes. Okay. You said that you went down the path of the misconception. You're more of a software company. Talk just about where that software could go? You've expanded the APIs somewhat. I think a lot of people underestimate the power of that as a voice and music platform in the home. But with -- talk to us a little bit about that vision and maybe educate people a little bit on where that platform could go?

Yes, I mean, as we look out over the next couple of years, we continue to see people just listening to more and more music and more music in their home. You're seeing tremendous growth in streaming music, which obviously is a big tailwind for us in terms of how people think they're going to get access to that streaming music. We continue to think that quality is going to become more and more important. At first, it was really cool to be able to listen to music on your phone, but expectations go up over time, right? So now you want it to sound better and better. And just law of physics, it's going to sound better on a speaker in your living room than it is coming out of your phone. So we think people continue to expect good quality. We think people are going to continue to expect good design. One of the things we're excited about with IKEA is you can get it in the lamp now if you don't want it to look like a speaker sitting on your table. And so all of those things are things that we're working to enable and continue to support where you see a lot of our software investments are in cloud and integration with those partners in enabling some of these services that we're talking about and in continuing to innovate and differentiate. A lot of things that happen when you go out and have a big-IP lawsuit as people say, "Oh, well, that's their only choice. They've stopped innovating. " And that's really not the case for us. We're investing heavily because we continue to innovate. We were the first platform to give you a choice between Amazon voice assistant and Google voice assistant. That's a lot of work. That's a lot of investment and software capabilities that we are pushing on. And so that's really where those investments go. We're going to keep getting better, and we're going to keep looking at different ways to get you listening to music.

Great. All right. I think that's a good place to leave it. So thank you very much, Brittany. Good to have you. Thanks, everyone, for coming.

Thank you.