Good day everyone, and welcome to the Sonos Second Quarter Fiscal 2023 Conference Call. At this time, all participants are in a listen-only mode. Later we will take your questions. And now I would like to hand the call over to Mr. James Baglanis, Head of Investor Relations. Please go ahead, sir.

Good afternoon, and welcome to Sonos second quarter fiscal 2023 earnings conference call. I am James Baglanis. And with me today are Sonos' CEO, Patrick Spence; and CFO and Chief Legal Officer, Eddie Lazarus. For those who joined the call earlier, today's hold music is a sampling from our Sweets and Spices station, which is curated in collaboration with Sonos in recognition of Asian and Pacific Islander month. Before I hand it over to Patrick, I would like to remind everyone that today's discussion will include forward-looking statements regarding future events and our future financial performance. These statements reflect our views as of today only and should not be considered as representing our views of any subsequent date. These statements are also subject to material risks and uncertainties that could cause actual results to differ materially from expectations reflected in the forward-looking statements. A discussion of these risk factors is fully detailed under the caption Risk Factors in our filings with the SEC. During this call, we will refer to certain non-GAAP financial measures. For information regarding our non-GAAP financials and a reconciliation of GAAP to non-GAAP measures, please refer to today's press release regarding our second quarter fiscal 2023 results posted to the Investor Relations portion of our website. As a reminder, the press release, supplemental earnings presentation, and conference call transcript will be available on our Investor Relations website, investors.sonos.com. I would like to also note that for convenience, we have separately posted an investor presentation to our Investor Relations website, which contains certain portions of our supplemental earnings presentation. I will now turn the call over to Patrick.

Thank you, James. And hello, everyone. This quarter was a tale of two cities. We executed the biggest and most successful launch in our history, and we did something groundbreaking by launching two new products simultaneously: Era 100 and Era 300. The Era 100 is the next generation of our best-selling Sonos One, featuring all-new hardware and software with next-gen acoustics and design that delivers detailed stereo sound and deep bass. The Era 300 is a bold, revolutionary new speaker that offers the best out loud listening experience for your favorite spatial audio content with Dolby Atmos. We also announced that Sonos is Apple Music's first and only speaker partner offering global access to spatial audio on Apple Music. These product launches took the industry and consumers by storm. WIRED magazine calls the Era 100 the new smart speaker standard and GQ said of the Era 300, 'the killer Sonos Era 300 speaker is here to kick-start a spatial audio revolution.' Both products boast excellent media and customer review scores and are selling ahead of expectations. Our team raised the bar with Era 100 and Era 300, reinforcing our commitment to leading innovation in the categories we participate in and creating products that will fuel our flywheel for years to come. We also entered a new category for fiscal 2023 with the introduction of Sonos Pro. We believe we have a tremendous opportunity to leverage everything we've learned and built for consumers to serve business customers. We've seen the consumerization of technology across many sectors of the industry, and audio will be no different. We're making it easy and reliable for businesses to create a great audio experience for their customers. This is a software-as-a-service offering as we explore the opportunities to provide services on top of our industry-leading hardware offerings. We take another step towards Sonos as a service for those customers that prefer that approach. But even as we made all of this progress, the near-term macroeconomic pressures we have flagged throughout fiscal 2023 intensified in Q2 and have diminished our second half and full-year expectations. While our financial results have generally met the expectations that we outlined for the first half of the year, we observed softening underlying demand trends in the second quarter. This softening, in conjunction with some of our channel partners tightening their inventory, has led us to reduce our outlook for the remainder of fiscal 2023. Specifically, we're taking our fiscal 2023 revenue guidance down 6% at the midpoint, resulting in a constant currency year-over-year decline of 3%. We knew that this would be a challenging year, but this is disappointing and inconsistent with our ambitions. I'd like to take a moment to further explain what changed since our fiscal Q1 earnings in February. First, exiting the holiday period, we began to see softening run rate registration trends in February, which continued through March. The market data that we track showed a pronounced decline in U.S. home theater sales in March. While the European home theater market remains very challenged, our home theater share gains in Q2 show that customers are still choosing Sonos over the competition despite the deep discounts that legacy audio competitors are offering. But ultimately, we are not immune to the widespread category weakness. Second, after being supply constrained in Amp and other key installer-oriented products for most of fiscal 2022, we were able to replenish this channel and clear the vast majority of our backlog in the first quarter of fiscal 2023. Since doing so, we have seen our dealers begin to work through the existing channel inventory and trend toward a lower level of weeks on hand rather than reorder and maintain prior levels. Third, while we exited the holidays with a relatively healthy retail channel inventory position, we are seeing some of our retail partners in EMEA tighten up their positions and reduce open-to-buy dollars. The cumulative effect of these three developments is unfortunately significant to our expected revenue over the next six months. You have heard us say in quarters past that if we started to deviate from our performance expectations, we would not hesitate to take the actions necessary to adapt to our environment and protect the profitability of our business. That's what we are doing and will continue to do. We are taking swift action to manage expenses so that we can still deliver an 8.5% to 10% adjusted EBITDA margin this year, consistent with our prior guidance. We've been investing heavily over the last two years because of all the opportunities we see over the long term. But harder times do require a renewed commitment to rigorous focus and efficiency. We will reduce our spending while staying on track to deliver our ambitious roadmap. Eddie will provide more detail on this shortly. Our focus remains driving sustainable, profitable growth over the long-term as we continue to innovate in our five existing categories and expand into three new categories. We are in the early innings of our growth as our more than 14 million households represent just 8% of the 172 million affluent households in our core markets. At the end of fiscal 2022, the average Sonos household had 2.98 products, up from 2.95 the prior year. This figure has steadily increased over the years, underscoring how the lifetime value of our customers continues to grow, and there's a lot of room for additional growth. As we have noted in the past, 40% of our households are single product households, whereas our average multi-product household has 4.30 products. We estimate that converting our existing single product households to the average multi-product household install size represents a $5 billion revenue opportunity. Of course, this will not happen overnight, but it does highlight the long runway that we have to further monetize our install base. We will continue to invest in the systems and programs to more aggressively pursue this opportunity in fiscal 2023 and beyond. I remain confident that Sonos is on the right track to continue to deliver value for customers and investors over the long term. The Era launch was incredible and ushers in a new generation of home speakers that raised the bar and will fuel our flywheel. Sonos Pro gets us into a whole new category and steps us into software-as-a-service and recurring revenue. And we are actively working on products in three new exciting categories. There's no doubt in my mind that we will emerge from this period as a stronger company and resume making progress toward delivering on our long-term targets of $2.5 billion in revenue and $375 million to $450 million in adjusted EBITDA. Now I'll turn the call over to Eddie to provide more details on our results and our outlook.

Thank you, Patrick. Before I discuss our Q2 performance and the details of our revisions to guidance, I want to echo Patrick and emphasize our disappointment in downwardly revising our second half expectations. Emerging from the pandemic has engendered sharp swings in fiscal conditions and consumer and partner behavior. After our resilient first quarter, we did not sufficiently anticipate how these circumstances would affect visibility into our business in the short term. As we navigate the remainder of fiscal 2023, my top priority is setting a strong foundation for fiscal 2024. This means evaluating how to right-size our expense base to enable us to make targeted investments in our product roadmap while delivering operating leverage. As I said in our fourth quarter fiscal 2022 call, we are not in the business of growing OpEx in excess of revenue. It is of critical importance to reacceleration top line growth while keeping expenses in check in order to achieve our long-term financial targets. Now turning to Q2. We reported revenues of $304.2 million, down 23.9% year-over-year, which was slightly ahead of our previously outlined expectation, but within the 25% to 30% decline range. Recall that Q2 of fiscal 2022 was anomalous due to backlog fulfillment stemming from chronic supply constraints and the timing of channel fill. On a constant currency basis, Q2 revenues declined 22.4%. Quarterly registrations declined 2% year-over-year, while products sold declined 29%. Quarterly products sold are based on favorable comparisons due to the backlog and channel fill factors affecting Q2 of fiscal 2022 that I just mentioned. Looking back a year further to Q2 of fiscal 2021 to smooth comparisons, this quarter's reported revenue is down 9%, whereas registrations and products sold are down 2% and 4%, respectively. Revenue declined by more than registrations and products sold due to adverse product mix shifts and FX headwinds. Our overall registration performance in the quarter was solid. We saw steadily declining run rate registration trends throughout the quarter. We attribute this to softening demand. A multitude of macroeconomic factors are pressuring the home theater category broadly, and competitors are becoming increasingly promotional. We are pleased to see share gains in home theater in Q2, but we are not immune to the widespread category weakness. Accordingly, we have extrapolated these lower run rates into our guidance, which assumes that demand will soften further throughout the second half of the year. We have also changed our assumptions around sell-in into the IS channel, where we are now assuming that registrations will run ahead of replenishment through the end of the year as installers work down channel inventory. Our prior assumption had been that installers would maintain and operate at higher levels of inventory after being undersupplied throughout the pandemic. Gross profit dollars declined 23% on a constant currency basis and 26% on a reported basis. Gross profit dollars declined by more than revenue due to a 150 basis point year-over-year contraction in gross margin, resulting in a 43.3% gross margin in the quarter. This represents a 90 basis point sequential improvement from Q1, but less than we expected to see, primarily due to adverse product mix given weakness in the home theater category, an inventory reserve increase related to end-of-life products, and excess components in FX. Excluding the impact of FX, gross margin was approximately 44.4%. Adjusted EBITDA declined to negative $10.6 million, considerably ahead of our initial expectations due to the cost actions that Patrick mentioned, which we began to take intra-quarter. Foreign exchange was an approximately $3 million headwind to adjusted EBITDA. Total non-GAAP operating expenses of $154 million declined by $18.3 million or 11% from last quarter due to delayed program spend, lower bonus accrual, and typical seasonality of sales and marketing expense. When we began to see demand soften, we delayed some program spending and slowed our pace of hiring while we worked to identify how to offset the expected revenue shortfall in the second half. We also took steps to right-size our real estate footprint in both Santa Barbara and Seattle in light of changes in office usage as we transition out of the pandemic. We ended the quarter with $295 million of cash and no debt. Free cash flow was negative $122 million in the quarter, largely driven by a $120 million decrease in accounts payable and accrued expenses, as well as a $25 million increase in inventories. At the end of the quarter, our inventory balance was $326 million, up 7% sequentially. Within inventories, finished goods were $274 million, up 5% sequentially. Our component balance of $52 million was up 14% sequentially. The reduction in second half revenue expectations will disrupt the harmonization between inventory and run rate sales trends in the near term, adversely affecting free cash flow. But as I have said previously, improving cash conversion remains a top priority. Before turning to guidance, we repurchased $15 million of stock in the quarter at an average price of $19.50 per share, representing 0.6% of common shares outstanding as of Q1. As a reminder, we have approximately $70 million remaining on our previous $100 million share repurchase authorization. Now turning to guidance. As Patrick mentioned, the developments we observed intra-quarter, both demand and changes in our channels, require us to significantly reduce our expectations for revenue in the back half of the year. To mitigate this, we are taking decisive action to adjust our expense base and protect profitability such that we can maintain our prior full-year adjusted EBITDA margin expectations. Our new plan assumes that we will be reducing our fiscal 2023 operating expense base by approximately $52 million at the midpoint. We will achieve these savings through a combination of reduced program spend, slowing planned hiring, eliminating open positions, bonus reductions, and some restructuring of teams. On revenue, we now expect to report full-year revenues between $1.62 billion and $1.675 billion. This represents a year-over-year decline of 7.3% to 4.4%, or 4.6% to 1.8% in constant currency. Our guidance bakes in a $46 million or 2.6 point FX headwind, approximately $33 million less than previously expected. Our revised FX assumptions are as follows: the Euro at $1.5 and the pound at $1.20. As a reminder, EMEA was 33% of our revenue in fiscal 2022, and our FX sensitivity is about four to one euro to pound. Based on results in the first half of the year, this outlook implies second half revenue of $648 million to $698 million. At the midpoint, this represents a $114 million or 15% reduction to our prior guidance. Inclusive of the favorable FX developments, this represents a $147 million or 19% reduction to our prior guidance. As Patrick outlined at the outset of the call, the three factors in our guidance reduction are: one, softening run rate levels of demand; two, dealers in our installer solutions channel targeting a lower than expected level of inventory; and three, retail partner inventory tightening, particularly in EMEA. We have adjusted our second half estimates to reflect these factors and are now assuming that our reduced level of run rate registrations will outpace our channel sell-in. On gross margin, we now expect gross margin will be in the range of 44.3% to 44.8%. Our revised FX headwind assumption translates to an approximately 150 basis points headwind to gross margin for the year. At the midpoint, this outlook implies a second-half gross margin of approximately 47%. We expect gross margin to improve from the 42% to 43% range observed in the first half due to lower promotional activity, fewer spot buys in the component market, lower logistical costs, and a reduced FX headwind. On adjusted EBITDA, in light of the expense actions we will be taking, we are slightly reducing our expected full-year adjusted EBITDA range to be $138 million to $168 million, representing a margin of 8.5% to 10%. Though the midpoint of $153 million represents a $9.5 million decline from our prior guidance, the range of 8.5% to 10% is unchanged. As previously discussed, a significant portion of the FX headwind flows through and reduces adjusted EBITDA. We now expect our full-year non-GAAP adjusted operating expenses to amount to approximately $630 million, a reduction of approximately $52 million from our previous guide. Looking ahead to Q3, we expect a sequential increase in revenue in the ranges of 10% to 15%, driven primarily by timing of channel replenishment consistent with typical Q3 seasonality. We expect sequential improvement in gross margin from Q2, primarily due to product mix, and for non-GAAP adjusted operating expenses to increase by $5 million to $7 million, resulting in a positive load to mid-single-digit adjusted EBITDA margin. Despite the short-term industry headwinds, there is no doubt in my mind that Sonos is well positioned to be successful over the long term. We will continue to invest in our exciting product roadmap, while making the right decisions on operating expenses to ensure that we can deliver operating leverage in fiscal year 2024. Last but not least, to touch briefly on our Google litigation, our trial in Northern California kicked off earlier this week. As a matter of policy, while the trial is pending, we won't be making any additional comments, but we will provide an update when appropriate. With that, I'd like to turn the call over to questions.

We'll take our first question from Erik Woodring at Morgan Stanley.

Hey, good afternoon guys. Thanks for taking the question. I guess if we just circle back to the points you're making here on channel inventory and whatnot, if we rewind three months ago, I feel like you guys were very confident that you weren't seeing any of these less open to buy dollars, weren’t necessarily seeing the impact on inventory. So I guess maybe my question is, what do you think changed in the last three months or even kind of in February and March that got some of your channel partners and dealer partners to kind of hit the brakes and say, 'well, hold on a second?' I'm just curious what feedback you have there, and then I have a follow up.

Well, Erik, we're living in extremely uncertain financial times. We always knew that this would be a difficult year. But things have happened from a banking crisis to a variety of other external factors. The question of whether there's going to be a default, I mean, you name it. And I think across a number of categories, certainly in the consumer electronic space, there was a softening of demand. Retailers now respond to that very quickly. In EMEA, things changed quickly in our run rates. And in the IS channel, the housing market's been in a tough spot. With the increase in interest rates, again, demand is down a bit. Since they had so much channel replenishment in our fiscal Q1, it appears they have decided not to hold the inventory but to work it down. We've factored all of that into our new guidance. You always wish that you had seen things a little quicker, but we live in a pretty volatile consumer environment, and so things have changed rapidly.

Yeah. I would just layer on there, I think Eddie nailed it, industry headwinds at the end of the day. The thing we go back to in these types of situations is how are we doing relative to what's happening out there? We’re seeing declines of anywhere from 5% to 20% year-over-year in sales in the categories that we compete. We're holding up well, even gaining share in some situations. I feel like our brand, the innovation you've seen with Era 100 and Era 300 positions us well for the long term, but we're seeing these really short-term industry headwinds blowing strongly.

Okay. That helpful color. And then maybe, Patrick, just on the Sonos Pro launch, I'd love to get some incremental color kind of from you on how you think about that opportunity. Why now is the right time? Is this you pushing this to customers? Is this your customers asking for this type of solution? Any guidance you can provide on the trajectory of the ramp or monetization or impact of the model over the next one to three years or however long you can help us think about that would be super helpful. And that's for me. Thank you so much.

Thanks, Erik. Yeah. So super excited about Sonos Pro. We take some time to build these things, but we do it based on what we're seeing in the marketplace. We've seen small and medium-sized businesses start to use Sonos because just like we've seen in many industries, the consumer solution is reliable and fantastic, easy to use, creating a great experience. We've been lucky in a way that businesses have chosen Sonos before we even had the ability to provide a service that allows them to monitor it and set permissions for employees, choose the music, and do all of these things. It's a good way to leverage everything we've invested in, and really bring that Sonos experience into small and medium-sized businesses. We're getting some organic interest off the start, which is exciting. We've been working with a lot of businesses and beta testing this, so we're feeling good about the experience and the early signs. I think it's going to be a big opportunity over time, especially as it really gets us into this commercial audio world that we think we can bring the amazing experience, reliability, and simplicity of what we do at Sonos to this large category. We've kicked it off, which is exciting, and we're looking forward to bringing new things into this space. So watch for more because we think it's a great long-term opportunity.

Awesome. Thanks for the color guys.

Hey, good afternoon. Thanks for taking my questions. So it looks like the second half guidance embeds about a four percentage point higher gross margin in the second half of the year versus the first half. Despite the talk about competition getting more promotional, it sounds like you're also maybe a little heavier than you'd like on inventory. So what gives you confidence that you'll see that improvement in gross margin in the back half?

So we fully expect to be less promotional in the back half than we were in the front half. That's going to be a significant piece of it. We do expect to see some continued supply chain improvement, and we're seeing that now compared to what we saw in the first half. The last piece is that the FX headwind is basically going to even out in the back half. We think we can hit that 47% number. We've hit it before, so we believe it's a reasonable place to target.

Great. And then I think you also called out $52 million of cost take-outs, if I had that correctly. How much of that is structural in nature that we should continue to assume continues in future years versus temporary meaning like that would need to come back next year?

Right. We have two things that we have to do that overlap at the same time. One is to make sure that we get our OpEx squared away for this year. That's the $52 million. Some of that would be OpEx savings that will roll over, while some of it is OpEx savings that won't roll over. But we’re looking to make sure our house is in order for fiscal 2024, and we'll take additional steps necessary to ensure that we add operational leverage next year. This makes the challenge a little tougher, but with discipline, we'll absolutely get there. As I said, part of the $52 million will carry over, part will not, but we are already looking for longer-term solutions for 2024.

Great. Thanks. Do you have an opportunity to lean into direct-to-consumer to offset channel inventory challenges? Feel like during the pandemic you did an excellent job leaning into DTC. So how should we think about that?

We are definitely leaning into DTC, Tom. You may recall that one of the things I mentioned in the prepared remarks is continuing to go after that enormous $5 billion opportunity in our existing base. DTC has also led the way. We've been selling sets, helping customers get started with more products. We use that to help our channel sell our products and package them effectively. There are omnichannel benefits. We absolutely are leaning into DTC and will continue, as we see significant opportunity there in our existing base.

Great. And then for my follow-up, how should we think about your ability to increase promotional activity and possibly take advantage of improving supply chain-related costs, so there'd be little to no impact on gross margin?

We're going to have to remain pretty targeted in our promotions. That's our standard practice anyway, Tom. We won't see quite as much improvement in component costs right now from what we bought earlier when prices were higher. We're going to be careful about promotions, using those savings to increase our gross margin to reach our target range.

The customer will see the balance, the value, and the innovation we're bringing. That is underscored by the market share we're seeing. We feel good about how we're positioned, even amidst legacy audio players running promotions we've never seen before. We will continue to innovate and deliver the kind of products that customers want and are willing to pay for.

Thanks, Patrick. Any color on the 100, 300? How that trended out of the gate relative to your expectations?

This is why it's a tale of two cities, Brent, because we launched those products after doing a big tour of media and artists. It generated over 4 billion impressions around that product, and the reviews have been amazing. Customer response has been remarkable. It's been ahead of our expectations despite the challenging industry moment. This proves that with innovation and these new products, we’ve got something great. We build these for the next five to ten years, not just for one quarter, and it's fantastic to see the Era products raising the bar.

Okay. And then, did you see this in the direct-to-consumer channel as well? Did that hold up better than the channel? And can you remind us, Eddie, what percent of the business is channel now?

DTC at the end of last year was around 22%, 23%. It doesn’t deviate much from that point now. We have seen registration trends under pressure across the board, which boils down to industry headwinds. Though DTC has tighter registration timelines, it remains challenged.

Hey, thanks for taking my question. Just a couple from me here. So firstly, I hope you could just touch on multi-product household formation in the quarter. What did you see there? Any color on the linearity? And how are you driving multi-product household formation as we get further in the year with macro uncertainty?

We've been really focused on this area. We haven't seen a deviation in our multi-product household formation trends in Q2. Eddie, I don't know if you have anything to add from that front?

We are registering more products per household initially, and the set strategy is paying off. Overall, the flywheel continues to spin with new households added. The external forces are just slowing us down a bit, which is reflected in the new guidance.

We'll continue to focus on that because we know NPS is higher and lifetime value is higher as well. You'll see us drive sets even more, particularly with our push around direct to consumer.

Any calls on Sonos' voice control versus the competition? Any incremental progress there?

We're seeing continued good momentum on the voice control front. Great feedback from customers, with high NPS and service on our platform continuing to lead the way. We have some exciting plans to improve it further. We're accomplishing this with a relatively small team, and we feel good about how our voice service is being utilized by customers.

Perfect. Thank you guys so much.

Thanks, Lisa, and thanks everybody for joining today. Definitely facing the industry headwinds, we're taking the necessary actions to ensure that we continue to have a strong balance sheet, remain profitable, and be able to invest in innovation. I remind everyone that as we set out into fiscal 2023, we discussed investing in categories that are pre-revenue, which takes us from two to three years, sometimes longer, in our product development cycles. We've never had a more exciting product roadmap but have also faced short-term industry headwinds we are navigating. We're excited about what we have coming in the future, and we're going to stay focused on building a sustainable, profitable company for the long-term. Thank you everyone.

That does conclude today's conference. We would like to thank you all for your participation. You may now disconnect.