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

All right. Let's get going. I'm Rod Hall, I'm the technology and consumer analyst [Technical Difficulty] Welcome everyone. I am halfway through first day, a lot of companies [Technical Difficulty]. I've got the pleasure of having Sonos with me; Patrick Spence, the CEO; and then Edward Lazarus, Chief Legal Officer and now CFO. [Technical Difficulty]. [indiscernible] So welcome, guys. It's really great to have you here.

Thank you -- thank you...

Thank you. I always love to interviewing companies that I actually have -- where I have the products in my house, maybe I can get a little hint as to what else I might I am able to put in the house. Maybe you will tell us.

No, I won't tell you that.

So why don't -- just for people that aren't familiar, I'm sure most people are, but why don't Patrick, you walk us through the company a little bit, IPO-ed in 2018, maybe just lay things out a little bit for investors, and then we'll jump into some specific.

Yes. So really, the Sonos is the inventor of wireless home audio. We've subsequently seen a whole bunch of people jump in. So we'll talk about IP as well and how important that is given who's jumped into the category and who infringes our intellectual property, so an important part of the story. But the most important part is we really brought software to the world of audio. And so we are the story of software eats audio and have disrupted the category in a big way. And so we'll do $1.7 billion in revenue this year, and that is -- I would have a $96 billion audio category, $22 billion in home audio. So we still have a lot of way to go. But we've been at this for a while, 20 years. And so we've really taken that out of all of the traditional audio players that have been there. And I think people spend more on audio every year than most people recognize. But we've done it in a very different way, which is we've done it with connectedness and systemness at the core. And so with each product you get, Sonos gets better. So you can play music around your home. Our average customer now has 3 products in their home, but most start with one and add more over time. And so we get about 40%, 45% of our sales every year coming from existing customers, adding another product to their system. And we can look at cohorts and we understand that people will get started with Sonos in a product or 2 and add more over time. And so that's a unique property that I don't know of any other consumer electronics company that really work in that way. And I always say that the true lifetime value of the Sonos customer is yet to be discovered because we continue to expand into new categories. And so we're always looking at -- as we think about all these categories of audio, we'll be able to expand in more and more. And so that lifetime value is really just limited by our own imagination. So over time, we expect to get customers buying more and more of our products. So there's 2 sides of that coin. One is attracting as many new customers as possible and then the other is continuing to sell to those existing customers and adding more. And so that's really the story of Sonos. And since we -- since I became CEO in 2017, I made a commitment to at least 2 new products every single year. That was a big change. Up to that point, we've been launching products kind of whenever they were ready, kind of one every couple of years. And so we've subsequently, for the last 5 years, launched at least 2 new products every single year. That helps with awareness and driving really the new customers and existing customers buying more. And I think a really important part of our story is that the #1 way that we get new customers is existing customers telling their friends and family about Sonos. So that continues to be and has always been the #1 way new customers come in, which obviously is organic, and I like the return on that investment for sure.

Great. Okay. One of the things we've -- I guess, in our own analysis struggled with the most with Sonos is what the growth profile looks like over the longer term. We've had this weird COVID period where I think you would agree, people probably bought a few more speakers than they normally would have. But I'm just curious what you think the biggest driver of growth is we finally -- when we finally normalize out of this, whenever that is, what drives growth for Sonos?

Yes. So we think in a normalized environment, we should be growing, and we've proven this pre pandemic, be a double-digit revenue grower every year to do this in a profitable way. So in the hardware world, you want to be building a profitable business you need to right from the start. Really, it is -- we're so early in this space with taking only $1.7 billion today of the, let's say, $22 billion home audio market, there's a lot more there for us to take. And that happens through both our existing categories. So we are the market leader, but we still have penetrated what we can penetrate in terms of the home speaker category, the home theater category, the portables category, like we're really just getting started in terms of where we are there. And then there's all these other categories of audio that we have other products and other things that we're working on. We've never had as many initiatives as we had today in terms of new products that we're going to launch in the future. And so it's a combination, Rod, of really like those existing products and continuing to market sell and that flywheel effect of those existing customers, not only adding more, but telling their friends and family about Sonos. And so we won't be in the pandemic, like Rod mentioned, for the last fiscal year, we were 27% up in revenue year-over-year, and that was even supply constrained. We could have done even more than that. But I think on a normalized basis, will be double-digit top line, we're going to grow, we're very committed to our gross margins of 45% to 47%. We have an adjusted EBITDA range of 15% to 18% over time, and we even delivered on that last year. So I think we have a very attainable kind of model in terms of what we want to do. And we want to take more and more of that $96 billion over time. And so I think we're very well positioned to do that when I look out in terms of the environment and the other players in audio.

If you -- you talk about double-digit growth, and you've just -- like you said, you're way below that $22 billion TAM, what do you think is holding growth back? I mean even if you achieve double-digit growth, why not 25% growth, why not 30%, what is it -- what do you think is the biggest gating factor on growth for the company?

Well, I think there's a natural kind of cadence of what people's purchases are, how they're building out their homes, like some of these things. And then we're not going for -- we're not going to go for the empty calories of just trying to take -- you've probably seen this from a lot of consumer electronics companies over time where they will go approach and think they need to do entry-level products. Apple even tried it at once with the 5C, right, in terms of what they did. And I saw this at BlackBerry, where you will go and try and chase some of that low-end demand at the expense of profit and some of those things. And so I would much rather, we're taking 20%, 25% of the share and capturing 90%, 100% of the profits in the industry than just chasing the empty calories. And so every company I've seen in consumer electronics that has those like big ups and downs and approaches it in that way, it very much comes with the ultimate empty calorie side of the equation and getting caught in certain situations. And so I think the key here is building it in a very methodical way and doing it in a very disciplined way as opposed to trying to overnight capture all of it. And so that and that you have to almost do it that way in our space because you need to do this in a sustainable way because one swing too big one way or the other in hardware, it can really mess you up in terms of where you are. And if you have to take some of those measures to reduce expenses and some of those things can really knock you off your R&D cycles and the commitment to at least 2 new products a year and all the things that really help us fuel innovation and growth.

I mean, you have -- through the cost controls, now you've created quite a bit of room for margin below the gross margin line, which is nice. You have the flexibility to do that even through cycles and so on.

That's right. And we took -- we took a really hard decision outside of the pandemic to kind of reorganize some things and restructure some things. And so we won't hesitate to do that if we need to if we're ever faced with those situations. But I like where we are right now despite kind of the consumer challenges we see right now, I like where we are in terms of what we're investing in and how we're positioned relative to what's happening in the marketplace.

Okay. Given you mentioned consumer and the challenges, let me kind of go there. We're asking everybody this question, but I want to span it a little bit differently in the sense that we're very confused, I think, as everyone is by this environment, we have been through 2 downturns. This will be my third as an analyst -- and I -- what I -- see on the one hand, normalization out of very high levels of spending and kind of overheating of demand, particularly for companies like Sonos. And then on the other hand, we do have some slowing economic indicators and consumer sentiments weakening and so on. And so I'm curious, first of all, what are you seeing out there? Can you give us an update on that, just generally? And how much of it do you think is normalization versus macro? Or I know it's a tough question to answer, but what -- just your thoughts on that... And I wouldn't be interesting.

I'm not an economist, but I do think -- so there's a couple of things to think about. One is we try to look at and understand what's happening. We saw a change in the trajectory of our business in June. That was a surprise because our April and May had been right on track with where we had expected and what we heard from retailers in June, it kind of turned pretty quickly. Last month, when we reported, we said, okay, we expect this to stabilize now based on what we're seeing or slightly soften. And then we came out this morning and just reaffirmed that, that is what we have been seeing. We've been seeing that stabilize in terms of where we are and what we've seen. This holiday is going to be really interesting. This is the first one in 3 holidays, we'll actually have supply.

Supply constrained in the other 2.

And we had talked about on the call, we have a new product coming out as well. But we don't know exactly where the consumer will be. I think one thing I would say, because you brought up like there are certain stories in the pandemic that were very pandemic related. And certainly, I think the team at Peloton would say, yes, like they benefited in that. We benefited to some degree, but it's not the same. Like if you look at Plume just did their WiFi data out there, people are listening to more on their smart speakers at home than they were before. They're watching more on their smart TVs than they were before, even as things normalize. And what you saw in that data is that at-home exercise has dropped dramatically, right? So there's some -- so I don't think we're the same as some of the companies that got huge spikes during the pandemic and really were behavioral shifts because everybody was stuck at home, you're still going to listen to music. More people are working at home, more people are watching streaming content even as travel picks up. And that's where we play, right? And that's where we play over time. There's still $96 billion a year being spent on audio products like that's going to continue to happen. I don't know that the TAM of like an at-home fitness or some of these other things have ever been in that position. And so I think we're uniquely positioned to continue to go after that. What happens in the short term of the consumer? I think everybody is confused. We're watching sentiment. We're watching new homes. We're watching employment, like all of these different factors, and they seem to be all over the place. I am optimistic that supply chain is getting better in terms of both availability but as well costs. And so that's a good thing. So I think we are going to be very much focused on what's happening with the consumer. And from what we've seen, at least in the short term, we've seen a stabilization for our business specifically.

Why did you feel -- we don't always see companies putting 8-Ks out to say, "Hey, we're seeing what we told you we were going to see." That's an uncommon thing. So I'm curious why you guys felt that was necessary?

Because we were coming into a conference where that was going to be everybody's question in terms of ... What are you seeing this quarter? And we felt it was the right thing to do was put out a statement and say, "Hey, that is what we're seeing" just so that everybody in the public knows that, that's the case and get past that. So we can get on to the -- what are the -- what's the reasons to believe for the long term, quite frankly. So...

When do you think -- back in the day, I used to cover Nokia, this was '07, '08 and then covered it through that. And then, of course, now covering the whole electronics industry. It used to be that back-to-school would give us a very good signal on what was going to happen post back-to-school -- then after '07 '08, I noticed that wasn't really true anymore. We really had to wait until Black Friday, and really, we didn't know until we got all the way to the end of the year. When do you think we'll know what's happening with consumer demand because you've got more experience at the...

We do -- and look, also the other thing is we see it every day, right? So unlike many in consumer electronics, you wait for the data from retailers or other things, we see what lights up every single day. But I don't -- so when somebody connects the Sonos, we automatically see it. But I would be -- given we got surprised in June, I don't think I should -- I don't think we can sit here and say, we know exactly, but we're going to be watching it pretty closely, and we're going to adapt as we need to, as we go through that. And so I think we just need to be very mindful of that. There'll be some things we know, some things we don't. We'll try to give color to people on that as we go through it and any time we provide guidance around that. But I also want to be -- I don't want to recognize that we got caught off guard in June. I think the retailers did. I think everybody did. And so I want to be careful about how we think through that. And I do think, Rod, like watching how things perform in -- over that Black Friday to holiday period will be really important. And just understanding that what are we seeing at that point? How are those consumers behaving differently, probably at that point in 2019 because the last 2 years, we just haven't had -- we've been sold out completely, right? And so it will really be a case of, okay, what does it look like? Does it look like anything pre-pandemic. The one thing on behavior that I would say we know and we've been watching very carefully given our model is how the cohorts behave, right? So people that buy and then repurchase. We have these cohort models that we look at. And the pre-pandemic cohort they look the same. If we look pre-pandemic and then this fiscal year, fiscal '22, the buying behavior of our customers look similar in terms of what's there. And so we'll watch those curves very closely to see, does the consumer that starts with Sonos, -- are they behaving any differently as they work through their life, but we haven't seen any. The good news is it looks very much the same. Now let's see how Black Friday, Cyber Monday kind of plays out this year and what happens on that front. But I think the name of the game for most companies will be how can you adapt, right, in this period and make sure then that you are taking advantage of opportunities that come up. But at the same time, you're not getting yourself like so over your skis that it's a big problem if you have too much or something like that. So it will be -- yes, the keyword will be adaptability [indiscernible].

Do you think that people are listening to more depressing music, they're more -- the economy is more likely to go down and listening of these stuff.

So we'll try to pipe only the positive in terms of... Control that like a great...

I want to listen to...

Yes, right.

Flywheel model, I want to come back to that because the number of homes that you give us, the homes added every year, and this last time you've given it to us, which is now getting away the way they exist last year.

That's right.

It was down just a little, it $7 million down $100,000 from the year before. And I would have -- one of my big hopes for growth in the company is that, that -- the homes added number would keep going up every year. I'm sure that's what you hope too. So can you talk us through that a little bit? What happened -- what do you expect to happen as we look forward to that home -- so you're going to presage what you're going to say at the end of the year. But just kind of generally What do you...

Yes. So every November, we give that number. And we certainly feel like the supply challenges, particularly around Amp. So we have an Amp product, which goes through our installed solutions to people that come to your house and install Sonos in your home, that's a lot of new homes for us. That was particularly challenged. The products that drive a lot of new homes were the ones that we had particular shortages on. And so those are the ones where I think our existing customers as well, were quickly going to sonos.com and making those purchases and those kind of things. And so I think it's been a little bit out of whack, quite frankly, just given some of the supply chain challenges that we've seen. But I also think it's like nothing to sneeze out in terms of adding another $1 million, whatever, like to the base, right, is important as we think about what we're doing. But yes, that's been kind of the challenge, I would say, over this period. I think if we had -- I think we would have done better than 27% year-over-year growth if we had all the supply that we needed in that particular period of time, and you would have seen that new homes number greater. And so as we get into more normalized here in fiscal '23, now we meet a consumer that is obviously facing macroeconomic challenges, like we'll have to figure out what that means. But at least we won't have that constraint to some degree or...

This housing market linkage, too, right? A number of people moving house, so how that's going to have an effect?

I guess, like -- yes, there's no direct correlation, but certainly, like it has to have some impact in terms of the overall numbers. Now the only thing is there's still the moving of homes, there's people that are more working from home, right. So that kind of changes the dimension of what people are doing, what they're willing to spend on their home. We'll see how the spend of people going -- of the more affluent consumer, who we address goes from travel and services to back to maybe home goods into the holiday period, right? So we've got some things that we'll be kind of watching closely to see how does that fuel growth in '23.

Let's talk about the homes market. You said there's about $145 million of affluent homes that you could address in your footprint, you've got $13 million now -- how do you -- you think it's all just a word of mouth? Or what -- is there anything else you can do, any leverage you can pull to move faster through that affluent base? And what are those people using now? That's the other thing. Like what -- what are they doing?

One of the big things we've noticed is people kind of simplifying to some degree. And so there's been these whole home solutions that have been out there for a while that some affluent homeowners would actually implement like a Crestron or Control4 or some of these things. we're seeing that less and less and seeing people more choose Sonos as the music service, and then they'll choose something else for HVAC, choose something else for lighting or what have you and kind of simplifying that even in the most expensive homes, which is kind of interesting. But we -- there's the organic side of the equation, but make no mistake, we invest in the awareness, right, side of what we're doing and when we did that a lot over the last couple of years. And so we know that we have better brand awareness. So as people think about these things, what they're doing and often is like inertia. And so like even one of the campaigns that we ran in the past was really to shake people out of that inertia, right? And like they might have a copy solution or just not realize they have the music solution in their house that they're not listening to or something like this. So we need to kind of shake and drive a catalyst like that. But as well, like we have to do a better job at the customer installer channel, so they're always pitching and they are pitching Sonos, but they're driving more installations. We're looking at other countries that we should be in as well to reach those because some of those are not in the major markets that we participated. We're looking at other channels that help us reach people faster. So we've been very conservative, I would say, in terms of the channels that we've been in. I believe, given my experience that many consumer electronics companies get overdistributed, but we may be underdistributed, quite frankly, in terms of reaching into some of those areas that we need to. And so I think it's a mixture of all of these things to try and tap into more of those consumers. We continue to do audience and consumer insights work to understand what it is that we need to say and do to actually trigger a change and get break people out of the inertia, break that regular cycle. But I also think it's okay that there's a regular cycle of people changing homes, like doing these things because we get the lion's share from that, and that helps drive growth, right? So like the natural cadence of what we see is very much the underlying how we get double-digit annual growth. And that's okay as a tailwind, right, as people change homes and do renovations and all these sorts of things. And so -- but we want to be catalyzing that throughout the way but doing it in a profitable, responsible way.

So when you say underdistributed, can you expand on that? Where would you be underdistributed like what channels are...

Some places, especially as we expand into new products like Roam and Ray, right at a different price point, there's channels out there that the more budget-conscious buyer would be going into that we're not in today. So I don't want to give any specific names, but...

But this is like retail channels, retailer...

Yes, there's online. There's digital marketplaces as well that we're not in. So yes, so there's a few...

What about international? Can you talk a little bit about how that expansion? I know back at the IPO, we we've been talking about that as an opportunity. And...

So we -- yes, we've gone into Japan, Mexico, subsequent of that, and those have been pretty good markets for us. Eastern Europe, we've started to expand into -- we're experimenting with India, South Africa. There's other things in Southeast Asia. So these are all things that we're trying to kind of lay the groundwork in. And then the other thing for some of these countries is making sure you have the right product mix and some of our products are -- some of our products are going to be better than others to actually hit what you need in those markets. So probably good contracts would be Roam, might be better than Arc in some of those markets. And so making sure we have the right product set to actually address those consumers is pretty important, too. And we're starting to get there in terms of the product mix that we have.

So the other thing I remember from the IPO is that there was some question as to how the product would resonate in Europe. There was the Amazon and Google products and people had started off buying those more than they were Sonos because Sonos more of a newer brand there than it was here. I'm just curious how that's played out now. Is it -- have you seen resonance with consumers there? Or how does the brand perception look there versus in the U.S.?

Yes. No, it's pretty even. So like probably the best indicator right now is as we looked at the market share data across all the major markets of Europe and then in North America, we held or gained market share across all of our categories, and we are in a strong position across Europe and it's mostly a growth story in terms of our share gain. And that's through some of our marketing activities, but I'd also say like the effect of got more customers having telling their friends and family and kind of working through all of that and quality products. And if anything, from 5 years ago, I would say that the Amazon and Google products have lost some degree of momentum, like anybody that wanted to get a $25 pockets gotten one at this point for the most part and all those kind of things. And so we found a good -- we found our products resonating and we've expanded in terms of like the different areas of products that we've gone into in Europe as well as North America. So that remains 50-ish-percent our business then.

Right. Okay. Good. Eddie has been very patient. So I thought I might jump forward and talk about...

But now you're going to ask me an IP question.

So these lawsuits, Eddie. Could you maybe give us a little bit of an update on the patent situation with Google? And for those that aren't familiar, just where are we? What's left to happen? So a little bit of a time line would be useful, I think.

Sure. So we've had 2 major offensive cases against Google. One we filed at the ITC a couple of years ago, very successful, 5 patents, all were found to be valid, all found that Google was infringing. That case is now on appeal, and that appeal will be decided roughly in a year. We're playing defense, obviously, against Google trying to overturn a big part of that judgment. But at the same time, we're also playing offense in that case. They were allowed to do some redesigns and degrade their products in certain ways that allow them to continue to import them. And we think we have some pretty good legal arguments for why they shouldn't have been allowed to do some of those redesigns. Once that appeal is over, the damages side of that case will begin out in the Central District of California. And with any luck, if we do well on appeal, it will begin under the shadow of a decision that says the 5 patents are valid and they're infringed. So we're very bullish on that. We have another case in Northern California, where we'll be going to trial in May on 3 patents, and the judge has already found that Google infringes one of those 3. He hasn't made any judgments at all on the other 2. So that's the offensive side of things. Now Google sued us in 5 jurisdictions around the world, in Germany, the Netherlands, France, Canada and the United States. And we have won every single aspect of all 5 cases that have now, to the extent they've been decided. Almost everything in Europe has been decided, and we've won everything. We just won in Canada, and we won a significant part of the U.S. case, and that case is currently on hold. So now they sued us again twice in the [indiscernible]ITC. We think we have excellent defenses again. But Google is a formidable adversary. We're going to take those cases really, really seriously. They don't like only being on defense. And so we assume that's why they decided to sue us again. It's frustrating because they infringe over 200 of our patents. They -- we invented the category. They came into the category. They should pay us a fair royalty as is the case with some other large players. But we're not doing it for glory. We're not doing it for honor. We're doing it for a return on investment. And so far, we feel as though our thesis around this is intact, and we're just going to have to keep going to the end.

You said something that I thought was interesting, which is -- so could you remind us what they've done to degrade the product. I seem to remember it was the adjustment of volume across all the rooms, but I don't remember if there are other thing.

It's like volume control. There's also some issues with respect to set up, but if we were to prevail on our aspect of the ITC appeal in the Federal Circuit, there are other much more significant things that they would then not be able to work around. And so we'll see what happens. We have our fingers crossed. We like to think we have good arguments. But I'm not making any predictions about what the Federal Circuit is going to do.

Because I thought, if any, the main thing that would be very difficult to get around is it's almost pioneered multi-room synchronization. Is that correct?

That is absolutely correct. That would be an aspect that would be much more difficult for...

Yes, volume. Who cares? Well, although I will say it's much to it than just volume...

And their customers think that, too. If you go look at the threads, there have been a lot of customer complaints. But what we don't really understand is work around or no work around, these products infringe another 195 patent, take the 5 patents out. There's a broad range of infringement on all of those products, and they should pay us a fair royalty. And we hope to convince them to do that. And until they do, we're going to keep going.

So what do you think -- I mean we've been through this a lot with Qualcomm. There will be a dispute and it's not exactly the same thing, but the dispute usually plays out over 24 months or so. With Apple, it was a little bit different with kind of what absolutely stratospheric. But curious what you think -- when do you think this will be behind you? Do you have any predictions on when investors could kind of say, beyond that point, I'll know the answer one way or the other, this will either go their favor, it won't go their favor?

I don't have a prediction as to the absolute end game, but I will say this. I think that the milestones that are coming up will be meaningful. What happens in the ITC appeal? How things are going in Northern California? How we feel about the case that is going to be coming back to life in the Central District California? These are all important. And at that point, I think people would be able to make an assessment about where things stand, but the absolute end game, that I can't predict.

Hard to predict. Yes. Okay, let me ask a strategic question related to this, though. Let's say you prevail, let's just theoretically say, you prevail, you win this stuff, what do you do with that? So you get -- in Google's case, you want a royalty. You've been pretty clear about that. Some sort of a royalty scheme. There are other elephants in this room. One particular I have in mind, I'm sure you do, too. How do you use that leverage? Like let's say you win, what do you do with it? Do you...

Well, so we do think that the Google cases are a bit of a demonstration in addition to everything else because it shows how strong the portfolio is, and that our infringement theories have a lot of gravitas to them. So it isn't just one player that we think about. But different players react in different ways. And we're business partners with these people, and we talk to them all the time. And we don't want to be engaged in this kind of [Technical Difficulty]. This isn't our core business. We want something that's fair that allows us to frankly take that money and reinvest it into our core business, allow us to do more R&D to expand into our categories more. This is not what we do for a living. This is just something we think is essential to defend what we invent. And so yes, there are more players in the field, and I'm not going to sit with you and describe the strategy at this conference, but we do think about all of them.

I was going to say, the thing I've got in mind is maybe I would love to have Siri on my Sonos, for example. I can't have it. Would you ever consider trading product functionality for royalties? I mean is that a strategic option you feel like you've got? Or is it just a...

Without addressing that particular example?

Right.

Of course. These are, first of all, huge and in their own field, very innovative companies, they have huge scale. There are lots of things we can think about with these companies, including Google. It's really more just they have to accept the fact that we did invent this, that they moved into our category and that there is something that needs to be done to address them. And, but otherwise, whatever we think would be good for the Sonos shareholder, we would do.

The other thing I -- just last question, I promise on this, and we'll move on. The other thing that I'm a little confused by is on my Sonos that I can either have Google Assistant or I can have Alexa, but I cannot have both. And it seems technologically like that should be possible. So I assume that, that is a legal decision, not a technological decision for the product?

Patrick and I both testified about this in Congress, but Sonos invented a technology that would let you just look at your smart speaker and say, hey, Alexa or hey, Google, and it would channel it into what we call it, concurrency. And Google contractually prohibits us from having concurrency on our speakers. We think that is fundamentally anti-consumer and wrong. And we want to be able to offer consumers that choice and not have you have your default set 3 layers deep in your phone.

Yes, it drives me absolutely crazy. Both of them in my house.

And you could use and we've demonstrated it, we've shown. Yes, I mean...

And Alexa and Sonos voice control are conferred on our speakers, so you know it works. because we actually do demonstrate.

Okay. Well, let's go down the product, right, since you mentioned it, let's talk about Sonos voice control a little bit. Where do you want to take that? I mean right now, I can do some music on it. How far could that go? What -- where do you -- where do you think that...

Everything that we do is to kind of power that flywheel in terms of what we're trying to create and do it in a different way. And so like as Amazon and Google have gone a mile wide and an inch deep, we've gone an inch wide and a mile deep on music. And so it's faster, it's more private as well. So that's another thing that our customers, and we're seeing a lot of customers that weren't using Amazon or Google use Sonos Voice Control. So that, to me, like tweak something like, okay, we're on to something here, which is interesting. We get a lot of inbound partner requests like to do something for them with voice. So that's an interesting. You got some optionality there as we go through it. But the thing I'm watching most closely right now is, what does it mean to engagement, and we know that they're listening more as a result of implementing Sono's voice control? And then does that translate into another purchase because we've seen that before. And if it helps fuel the flywheel. That's something that's important. That is our hypothesis, as we go into that. And as we think about any of this innovation, and I would point out the amazing thing is, that's a team of 70 people that work on Sonos' Voice Control. And as I think everybody knows, because we've heard it 1 million times, Amazon has 10,000 people working on Alexa. But also I think it shows the power of how scrappy and innovative our teams can be. And that came through an acquisition that we did as well. But we're going to focus, Rod, very much on the audio side of it and how we create that great audio experience as opposed to trying to figure out how you answered some random question that some kid asks, right, and going through it. And so we're going to stay very focused in kind of this lane and make it the best for audio.

Great. Okay. We've got a few minutes left. I want to see if anybody in the audience has a question for these guys before I keep going. Anybody in question out there. Okay. All right. Let's go back to some of the important but more boring financial questions. So, the -- what I perceive to be happening in June, you guys called out was more of an inventory problem than it was a demand problem in a way because -- is that correct? Like in other words, the retailers are all realizing, hey, I've got way too much inventory. These supply chains are shortening. I need to reduce. And then from the top down, we've heard people say we're not taking any more inventory.

Right. Right.

Is that right or...

That's part of it. But I think we'd be remiss not to acknowledge the fact that we have that day-to-day registration information. So we see what's actually lighting up on a day-to-day basis. And April and May were exactly where we had expected and then June, we saw some weakening. So -- but I have never seen, you and I both lived through like 2 different corrections in this. And again, who knows if this is a recession or not, like let's not get into the semantics of it, but there's something going on because quickly, all the retailers and as fast as I've ever seen, have adjusted as well because they saw something, right? And so in the month of June, we saw something, they saw something. They quickly froze like purchases and some of these things. Even though we know they're not holding a lot of Sonos inventory, they've done a lot of inventory stuff that isn't moving and they're trying to clear that stuff out. So that compounded kind of where we are. But I do think, Rod, the underlying consumer side of it, too. There is some weakness there, and we just -- we're monitoring and that's why we have to see what happens in Q1. But I've never seen the retailers respond as quickly as they did across...

In June, it's very weird.

It's very early, very weird. But again, that might be, everything has been weird the last couple of years. That might be a good sign that then it will swing back, right, because they make those adjustments and do some of those things, and they're a little bit more cautious moving forward.

Promotions. Let me talk about that a little bit. I've been getting more Sonos discounts in my e-mail lately. Where are we on promotional activity? Is it back to normal? Is it...

We will be -- it hasn't been back to normal because we're still a little bit constrained on some products. But for a holiday period, we will be back to a more traditional approach there. But again, as you know, we're not promotional in the way a lot of consumer electronics companies are. So it's still within the bounds of that 45% to 47% gross margin that we aim to deliver. But we are interested to see what we can do with actually some supply and a promotion for this holiday period, which we haven't had for 3 years.

Let's talk about pricing. Apple just increased prices in some areas due to FX. Did not increase their high-end phones. We made that call. A lot of people missed it.

Congrats.

Thank you. So -- but I guess the question is, what are you going to do with -- you've made some price increases not too long ago.

We did. We did.

Are you where you need to be? Is FX catching up with you. Would you talk us a little bit about that?

Yes. Historically, we've done it, so we did one last year, given everything going on in the world at that point in terms of supply chain. And we've done 3 in the past for FX reasons, in a variety of countries over the past 10 years. Each time, the elasticity, we've been wrong on elasticity. Our products are more inelastic than we thought. And so we're -- but we want to be mindful of everything that's happening in Europe right now. We obviously -- we're probably most compared to Apple generally. And so like we watch kind of what they're doing and going through it. So we're just trying to figure out what the right thing to do is and that balance of elasticity, but we've shown an ability to raise our prices and continue to grow unit volume and deliver growth into all those things. So we'll be mindful of that, and we just want to understand we're not economists at all, but we just want to do the right thing for the long term in terms of trying to get that balance of growth and profitability.

You recently delayed a product launch or called out a delay of a product launch. Can you just remind us, you delayed it from win to when my perception was September to the next quarter, but could you remind us of the...

Yes. So we delayed the general availability of that product from our fiscal Q4, which ends this month, in 3 weeks, so end of September into the holiday quarter, which is our fiscal Q1, the October, November, December quarter.

And can you say again what the primary driving forces there were?

Yes, we launched an amazing product called Ray, which just got a 9 out of a 10 review from Wired. The media reviews of the product have been amazing. Our channel partners have told us it's amazing. Customers have told us it's amazing. We launched that in June in the moment where the consumer started to back away from purchasing things. And so we thought, okay, like what do we do with this other product we have? Let's give it a little bit more time to try and launch it in the big window for audio products, which is the holiday quarter. So we're just trying to set it up to the time where more people are out thinking about purchasing something. People are back from vacation right after everybody blew it out over the summer because they hadn't been able to travel for 2 years. So give ourselves an opportunity to put it in the best position possible without pushing it out too far, right? Because it was ready to roll all those kind of things. So we just put ourselves in a little stronger position.

I mean, to hit the window, you kind of have to launch it in October time frame, right? And then...

Yes.

Okay. I guess last, anything on capital allocation standpoint to talk about M&A? Anything that you guys feels important for investors to know?

Look, we think we have a very, very strong balance sheet. We have more cash on the balance sheet than we need to run the business. And we've taken a balanced approach where when we see M&A opportunities that can accelerate our road map, we've seen them. We've seized them. But at the same time, especially where our stock has been trading recently and occasionally over time, share repurchase becomes a very important strategy for us. And so I think you could expect the same kind of balance we've shown in the past that we would continue in the future.

Great. Okay. Well, we're out of time, unfortunately. A lot of more questions. I did want to ask about receivers and things, but unfortunately, I won't get there. So thanks anyway for -- thanks very much for coming, you both.

Thanks. Appreciate it.

Good to see you.

Thank you, Rod.

Thanks, everybody.

Thanks, everybody.