Sonos, Inc. Price & Performance (SONO)

I had to balance effectively communicating these complicated changes involving around 200 departing colleagues and nearly 1,000 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 after 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 let 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 the late breaking shifts to all of this. Thank you for the insight. Maybe top two or three most important changes you think the company has to make going forward?

As I said, I have a pretty pretty strong bias to action. And in my first three point five 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 Sonus back on track, which means improving the core experience for our customers, optimizing our business to drive innovation and delivering operational and financial [indiscernible] Okay. The last message was the app was almost there. Where do we think we are today? And how much longer is it going to take to get both the iOS and the Android experience where they need to be to kind of restore the brand?

So the team certainly made a lot of progress in Q4 And 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 to excellence in the core experience kind of having moved beyond getting the app back to the 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. [indiscernible] And any timetable for when you think you'll be satisfied?

I mean, at some level as a product and engineering leader of thirty years, I'm not sure I'm ever going to be fully satisfied. Part of what makes great companies is to continuing to invest 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 Hi, Steven.

Tayori. 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 Q3 Great. Thank you. I'll go back into the queue. Next question comes from the line of Logan Katzman of Raymond 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, are you 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 think I'm probably going to hold off on making specific commitments about the product roadmap.

Yes, makes sense. Thank you. And then just one last question from me. Any changes to capital allocation or anything that you guys want to talk about around that?

You can take that question. We continue to focused 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 had to resume the buyback as we mentioned, and we continue to be judicious about our capital allocation and returning capital to our shareholder remains our pillar of our strategy.

Great. Thanks guys. Your next question comes from the line of Eric Woodring of Morgan Stanley. Your line is open. Great. Thank you so much for taking my question.

And nice to meet you Tom. 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 [indiscernible] 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 had sort of business unit organization strategy where there were separate, organizations for different elements of our product line. A professional category, a portables category, a home category and so on. What that meant is we had a bunch of kind of redundancies across those teams, that have a head of mechanical engineering, for example, on each one and team members underneath that. 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 to to react in the lead to market conditions. So by moving to a functional organization with a hardware team and a software team and a 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 that just lets us move more quickly and it gets us collaborating much more efficiently. And that's described 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 if I could maybe double click on that is, it seems like that's been the and please correct me if I'm wrong, kind of the Sonos Sonos 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 we look back beyond maybe the last three years, you guys were going through 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 success successful structure going forward? Or is this really just about making sure you're being more efficient going forward?

Yes. Actually, the business unit structure was put into place about eighteen months ago, at replacing what I would call a semi functional model That was I guess I would describe it as hardware top heavy and its previous incarnation. Where the encoded in the hardware organization where some of these same more product line dimensions, but the hardware group is complemented by a functional 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 works 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. That makes a ton of sense. And thank you you for that clarification. Super helpful. And then last question from me, Sayori. I know you don't guide beyond the quarter out. If you look and I appreciate comments you made on the product launch last June. If you look back in history and just exclude the June, your seasonality in fiscal 3Q revenue seasonality has been anywhere between down 7% to sequentially and up 42% sequentially. It just leaves a very wide range for consensus to fall in. I'm just wondering if you have can share any comments to help us on the call kind of make sure that we're kind of thinking about just where maybe what years we could look to in history to maybe set the proper bar for the June? I 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?

Hi, Eric. Thanks for that question. It certainly is challenging even if I was looking back if there was a pattern there into 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 living at that at this point. Exactly to your point, there is not not a great pattern on a sequential basis going into Q3. So thank you.

Okay. Okay. I understand. No, I understand. Thank you so much, Taori. 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. Wanted to ask about the workforce reduction and just more broadly, as 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 so much of what we do that people perceive as hardware is 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 talented team around design, QA, operations and so forth that complements all of that in our product organization. Sarah, do you want to talk to how that relates to our Yes. Just from a if you look at our OpEx, you'll see the ratio among just on a dollar basis. Among R and D, sales and marketing and G and A. Now No, there are cyclicality to the marketing spend for holiday seasons and so forth. So just generally in aggregate, But from a headcount perspective, Vest, probably a biggest part of the company by far is R and D headcount. And then there's G and A headcount and then sales and marketing headcount. Marketing, as would have a big part of the expenses related to the the non headcount dollars with G and A more leaning towards the headcount dollars as is for R and 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 relative terms in terms of headcount resources.

Okay. That's really helped And then, Sayori, 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 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, and that could be anywhere from real estate footprint that may or 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 it's there's still opportunities as we said on the earnings on the prepared remarks, that there are still opportunities that we can continue to I'll just add I was just going to add that if you look at my background, you're going to 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 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.

Thank you.

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

Line is open.

Thanks. Tom, just on the 12% reduction in force, can you discuss was that kind of across all functional areas? Was it focused on a couple of bigger areas?

And perhaps you could discuss some of the changes that you've 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 have a cleaner, simpler experience.

Yes. So a lot of great work had been done by Sayori to bring our operating expenses in line in the G and A lane in previous quarters. This This set of changes was really focused on the remaining dimension [indiscernible] in the product organization. As I've described, the reorganization itself revealed significant redundancies across the product organization step into a smaller but more effective team is 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 organization smaller, but more efficient and more powerful. I'm really confident that we have the right team in place to deliver on 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 for the go forward plan. It's a great group. I know we're going to 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. From a revenue results perspective, certainly a was an 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 we were as we continue to go through the recovery of our brand, certainly, 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.

All right. Thank you. With no further questions, that concludes our Q and A session. We thank you for your attendance.