By Dan Gallagher
There's never a great time to infuriate your most loyal customers. For Sonos, the timing couldn't have been worse.
The maker of premium wireless speakers and other audio products issued an ambitious overhaul to its app in early May. Too ambitious, as it turns out. Bugs left many customers unable to connect or use their speakers. The severity of the issue was made clear in the company's fiscal third-quarter call in August, when Sonos slashed its forecast for the fiscal year and put a hold on new product launches while working to resolve the issue.
It isn't over yet. In its fiscal fourth-quarter report Wednesday, Sonos reported a 16% drop year-over-year in revenue and a 17% drop in unit sales. This was despite the fact that the September-ending period included the first full quarter of sales of the company's first headphone product, which was inconveniently launched just weeks after the initial rollout of the disastrous new app. Sonos also projected revenue in the range of $480 million to $560 million for the crucial December quarter, the midpoint of which would represent a 15% decline in sales from the same period last year.
The one saving grace is that the forecast came in a bit above Wall Street's already slashed projections, producing a "beat" that sent the stock up nearly 6% in after-hours trading. It is a small salve; Sonos shares have regained some ground over the past couple of months, but the stock is still down 21% from the day the new app launched. The S&P 500 is up 15% in that same period.
Can Sonos ever fully recover? The company definitely has dented its brand, but that brand has also long established itself as a strong player in premium home audio. Sonos also has held its own against bruising competition from smart speakers launched by deep-pocketed tech giants like Apple, Amazon.com and Google. For example, Sonos saw its sales jump 20% to 6.5 million units in the fiscal year that followed Apple's launch of its first HomePod, which was later discontinued due to disappointing sales.
But Sonos can't escape its own misfires or the gyrations of the global economy. Its bungled app launch came just as the market for home electronics was contracting following a Covid-induced boom. Sonos has reported revenue declines in eight of its last 10 quarters.
Its first headphones also haven't had a smooth ride. Despite strong reviews for the product called Ace, Sonos Chief Executive Officer Patrick Spence said on Wednesday's earnings call, "We have found that building momentum in headphones is taking longer than we had originally anticipated." That is partially due to the app rollout, but Spence also noted "unprecedented discounting and permanent price drops from the established players" in the headphone market.
Sonos thus has a lot to manage in its new fiscal year. Fully repairing its brand won't be easy -- or cheap. Sales and marketing costs in the latest quarter represented 29% of revenue, which is the highest proportion for that expense line in six years. And Wall Street is a bit turned off; only 50% of analysts covering the company still rate its stock as a buy compared to 75% earlier this year, before the app rollout.
"We fear the app debacle created more damage than Sonos has let on," wrote Brent Thill of Jefferies in a note ahead of Wednesday's results.
Sonos will need a very merry Christmas to start putting those worries to rest.
Write to Dan Gallagher at dan.gallagher@wsj.com
(END) Dow Jones Newswires
November 14, 2024 06:00 ET (11:00 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments