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Sonos ‘in pretty stable condition right now,’ CEO says

Sonos CEO Patrick Spence sits down with Yahoo Finance’s Brian Sozzi to discuss macroeconomic headwinds, inventory, discounting, the product pipeline, and profitability.

Video transcript

[AUDIO LOGO]

BRIAN SOZZI: Earlier today, I had a chance to sit down with Sonos CEO Patrick Spence on the back of the company's latest earnings report. Spence tells me sales have stabilized ahead of the holidays.

PATRICK SPENCE: You know, really, we had a reset in June when we saw consumer demand slow down. And the good news is our business has stabilized. So we came in a little better than expected. And we set out for the year ahead. And we're trying to be prudent in terms of the way we look at it. So we're assuming the stability continues.

We've seen a good reaction to our new products, Sub Mini. The Ray product that we reduced-- that we introduced in June has also come along. It's now number one product in the UK, Germany, and the Nordics in terms of soundbars in the entry-level category. So we feel like we're in a pretty stable condition right now. We're just monitoring it very closely.

BRIAN SOZZI: When we were talking about your earnings on Thursday, my coanchor Brad Smith brought up the point, what is stable? Does stable mean you're growing sales again?

PATRICK SPENCE: So we've said for the year that we'll be in constant currency will be flat to up 7%. So usually, we look at success as growing our revenue by about double digits every year. And so it's definitely tempered compared to what you would expect in a more normal economy.

And so that's what we're seeing right now. We've kind of based our estimates off what we know today, right, because nobody really knows what's going to happen next year. So we've assumed it'll stay stable like this, and we're just watching it very closely.

BRIAN SOZZI: I know what happen-- I know what's going to happen.

[LAUGHTER]

We--

PATRICK SPENCE: Please tell us.

BRIAN SOZZI: No. You know what's interesting, we've been hearing more lately that higher-income households are pulling back in spending. I mean, you're not an economist. I'm not an economist. Why do you think this is happening? And what does it mean for your business?

PATRICK SPENCE: You know, I'm not-- from what we see right now, we're not seeing that. We're not seeing trading lower. We're not seeing-- we've seen that stabilization. Now, we did see a change in June, as I mentioned, right?

So we have seen it adjust. Maybe we were ahead of the curve a little bit on that, right, in terms of audio. So I'm not sure why people would be. There's been more travel. I think travel has gotten a lot more expensive. And so it'll be interesting to see how does that moderate as we get through the holiday season, a lot of travel is done with.

Do people at the beginning of the year take a moment to pause and look at their finances and say, what am I going to invest in this year? I suspect there'll be a pause as people look at that. But I feel like our business is in a good position because we have such a strong existing customer base that accounts for 40% to 45% of our sales per year.

BRIAN SOZZI: How promotional are you prepared to get this season?

PATRICK SPENCE: We are very controlled in the way we do promotions. It's exciting because for the first time in three holiday seasons, we're actually able to do a promotion. Supply chain challenges--

BRIAN SOZZI: Wish you would have told about--

PATRICK SPENCE: --are largely behind us.

BRIAN SOZZI: --two years ago there, Patrick. Thanks so much. I appreciate it. You could have said, hey, maybe two years from now we're going to do a promotion and save-- save your money.

PATRICK SPENCE: Well, and it's great to be able to do it. But our products last for a long time. So we have more inventory right now than we would like. But at the end of the day, we know it will sell out over a period of time.

We're very disciplined in terms of what we do on margins. And so we don't need to-- we're not like an apparel retailer that needs to clear out for next season or anything like that. These products will sell over a period of time. And we just ramp down or ramp up production, as we need to, in order to moderate that over time.

BRIAN SOZZI: Is it across-the-board promotions or specific product lines?

PATRICK SPENCE: It's across the board, largely. Our newer products typically don't get a promotion when they're in their first year of life, but the others all will.

BRIAN SOZZI: How would you characterize the inventory levels at some of the big-box retailers you sell at?

PATRICK SPENCE: Yeah, so I think the big-box retailers are being a little more cautious in terms of the inventory that they're taking right now. But we feel like we're in a good position. I think they're getting more targeted on those products that are moving more quickly. And they're just-- they're being more mindful of that and kind of keeping an eye on it, which makes sense in this environment, right?

BRIAN SOZZI: Have you seen component inflation cool down? I can't imagine costs are decreasing, but has the rate of change started to slow a bit?

PATRICK SPENCE: It's definitely started to slow. And you've probably seen some of that shipping and logistics data too. It's really come back. And so we're seeing all of the costs of supply chain start to moderate. And we're seeing availability change dramatically as well. And so this is classic, right?

We saw an unprecedented increase in demand across the technology landscape over the period of the pandemic, and now it's starting to moderate. Everybody is making adjustments. And so I do think that you'll start to see that over time. It's already seen in availability. Now, over time, I think costs will moderate. I don't know if they'll come down, but they'll definitely moderate from where they are.

BRIAN SOZZI: What's your biggest priority for next year?

PATRICK SPENCE: Really staying focused on these four new categories that we're going into. We're super excited. We've got some great products lined up for the future.

BRIAN SOZZI: Corvette speakers, right?

PATRICK SPENCE: Yeah, exactly. Just for you.

BRIAN SOZZI: Appreciate it.

PATRICK SPENCE: But I think the-- for us, it's really focusing on using this period of time-- there's so many companies that are retrenching right now. And we've been working on profitability for four years. And I like to talk about sustainable, profitable growth. So we put ourselves in a position where we can invest right now.

And we believe we'll come out of this period even stronger and with new products, expanding into new categories, and putting us in an even better position. And so we're watching that very carefully because it is different than the way most companies are approaching this period of time. So we'll just have to watch our business, make sure we remain profitable and in control of our own destiny, but we're pretty excited about the future.

BRIAN SOZZI: What's your philosophy on subscriptions? So I buy a Sonos speaker. I am not paying you a monthly recurring fee. Maybe I should. I don't know. I'll probably give you some money to pay for something else. But what are you thinking about for next year? Is that something even on your horizon?

PATRICK SPENCE: Yeah, so we've kind of dipped our toe in the water with Sonos Radio. So Sonos Radio is now the number one listened to service on Sonos. That just happened. It's about 30% of the listening hours on Sonos.

And there's a free version, which is ad-supported, so we get a little bit of ad revenue. And then there's also a paid to remove the ads and get higher-quality bit rates as well. So we've dipped our toe in the water there. It is something that I would like to layer on over time and look for other opportunities to do that. But nothing more than that today.

BRIAN SOZZI: I only know you as the CEO of Sonos, Patrick. You've been the CEO for a while. You've seen a lot of economic cycles during that time. What's your advice to other CEOs managing through these, I don't know, just challenging times? Whether it's component inflation overseas, consumer demand in the US, you know, what's the-- what's the secret here?

PATRICK SPENCE: I think the key is staying nimble and really staying on top of where the business is, getting as many signals as you can. We're on it every day to understand the way things are moving and what's happening in the marketplace. And you're trying to combine that with the long-term outlook you have and make sure that you're not sacrificing what you're trying to do in 2024 or 2025 to-- but you have to put yourself in a position where you can navigate 2023.

So making sure that you can navigate those short terms but investing for the long term is the thing we're all trying to really get the balance right on. And certainly we're not perfect, but that's what we're dealing with every day.