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Why Is Sonos (SONO) Down 7.8% Since Last Earnings Report?

A month has gone by since the last earnings report for Sonos (SONO). Shares have lost about 7.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Sonos due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Sonos Q3 Earnings Fall Y/Y

Sonos, Inc. reported non-GAAP earnings of 19 cents per share in third-quarter fiscal 2022, down 29.6% on a year-over-year basis. The Zacks Consensus Estimate stood at 6 cents per share.

Quarterly revenues declined 1.8% (up 2.2% on a constant-currency basis or cc) year over year to $372 million, owing to soft demand for its products amid continued supply constraints and unfavorable foreign exchange movements. The top line missed the consensus estimate by 13.2%.

Owing to weak global macro-economic conditions, lingering supply chain troubles, moderating run rates in business and caution from some of the company’s retail channel partners, the company slashed its outlook for fiscal 2022. The company also postponed its product launch from quarter to the first quarter of fiscal 2023.

Sonos now expects revenues to increase 1-2% year over year in the range of $1.73-$1.755 billion. The company earlier expected revenues to increase 14-16% year over year in the range of $1.95-$2 billion. On a constant-currency basis, revenues are expected to increase 4-5%, assuming $50 million in foreign exchange headwinds. The gross margin is now projected to be between 45.7% and 45.9% compared with the earlier guidance of 45.5% and 46%.

Revenue Details

By product category, revenues for Sonos speakers were $314.2 million, up 1.3% from the prior-year quarter’s levels.

Sonos system products revenues were $38.4 million, down 19.4%. Partner products and other revenues totaled $19.2 million, down 7.7% year over year.

Region-wise, revenues from the Americas came in at $232.4 million, up 3.9% year over year. Revenues from Europe, the Middle East and Africa were $112.7S million, down 10.7%. Revenues from the Asia Pacific were down 7% to $26.7 million.

Other Details

Gross profit was $175 million, down 1.1% from the prior-year quarter’s levels. Gross margin expanded 30 bps year over year to 47.3%, mainly due to higher selling prices amid increasing component costs.

Total operating expenses were $168.9 million, up from $161.1 million, reflecting higher research and development and general and administrative expenses.

Operating income was $7 million compared with $16.7 million in the year-ago quarter. Adjusted EBITDA totaled $42.1 million compared with $46.7 million in the prior-year quarter, with respective margins of 11.3% and 12.3%. The downside in adjusted EBITDA was caused by higher operating investments and lower revenue.

Cash Flow & Liquidity

For the fiscal third quarter, Sonos used $6.7 million of cash from operations. Free cash outflow was $16 million.

For nine months ended Jul 2, 2022, cash generated from operations was $75.7 million compared with $246.7 million in the comparable period of fiscal 2021. Free cash flow for the same period fell 76.1% to $50.7 million.

The company repurchased shares worth $43 million in the third quarter, taking the count to $117 million year to date. It has shares worth $33 million left under its existing $150-MILLION authorization

As of Jul 2, 2022, the company had $439.7 million in cash and cash equivalents compared with $606.7 million as of Apr 2, 2022. The company has no debt.

Adjusted EBITDA is estimated to be between $215 million and $230 million, with the margin ranging from 12.4% to 13.1%. Earlier, the company projected adjusted EBITDA to be between $290 million and $310 million, with the margin ranging from 14.9% to 15.5%

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

The consensus estimate has shifted -451.02% due to these changes.

VGM Scores

At this time, Sonos has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Sonos has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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