Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sonos Third Quarter Fiscal 2023 Earnings Conference Call.

Thanks, Emma. Good afternoon, and welcome to Sonos Third 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 Sunset Fuzz station. 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 also 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 third quarter fiscal 2023 results posted to the Investor Relations portion of this 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 also like to 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.

Thanks, James, and hello, everyone. Earlier this afternoon, we reported strong fiscal Q3 results. We are winning in the categories in which we play, and I'm proud of the team's execution as we outperformed the competition. The categories of consumer electronics that we participate in remain challenged as conditions have not yet returned to what we would consider normal, and we continue to see unprecedented levels of discounting by our competitors. Despite this, our brand and product portfolio continue to perform well. Consistent with past quarters, we have continued to gain significant market share in home theatre in both the United States and Europe. This is a testament to our continued investment in research and development, which remains focused on two things: raising the bar in the existing categories where we play and entering new categories in innovative ways. Speaking of raising the bar in existing categories, our new Era family of products is off to a great start. We have seen media and consumers alike embrace Era 100 for its detailed stereo sound and deep bass and Era 300 for its impressive out loud spatial audio listening with Dolby Atmos. Each product has earned stellar reviews from both media and consumers, with consumers rating both the Era 100 and the Era 300 at 4.8 out of 5 stars on sonos.com. A recent Forbes review of Era 300 noted it is nearly as perfect as any wireless speaker can be. The spatial audio performance is fantastic. Last quarter, I outlined what changed between our Q1 and Q2 earnings and how that affected our guidance for the second half of this year. We are tracking to those revised expectations. And thus, today, we are maintaining the midpoint of the guidance we issued for the second half for revenue and adjusted EBITDA. We saw a reduction in channel inventory in Q3, consistent with our expectation for registrations to outpace selling. We expect this to continue through Q4, particularly in Europe and Asia Pacific, where retailers continue to tighten up. As for underlying demand, strength in the Americas helped offset the impact of the tough economic climate in Europe and Asia Pacific. Specifically, in the Americas, we saw steady registration trends through the quarter, followed by a strong response to our Father's Day promo in mid-June. In both Europe and Asia Pacific, registration trends generally softened through the quarter, which we expect to continue through Q4. As I've repeatedly said, we would reduce our spending if necessary to hit our EBITDA commitments, while staying on track to deliver our ambitious roadmap, because harder times require a renewed commitment to rigor, focus, and efficiency. This commitment led us to announce a 7% reduction in force in mid-June. This rightsizing of our expense base will enable us to increase future profitability while making targeted investments in our exciting product roadmap. Our journey to drive more efficiency in the organization is never over. We will continue to closely scrutinize our cost base and do whatever it takes to deliver on the kind of long-term profitability we've targeted. Our focus remains on driving sustainable profitable growth over the long term as we continue to release products in our now five existing categories, Sonos Pro was added this year, as well as three new categories we expect to enter. 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. As we have noted in the past, 40% of our households are single product households, whereas our average multiproduct household has 4.3 products. In other words, we are starting to get into the range we have previously discussed: 4 to 6 products for every mature Sonos household. We estimate that converting our single product households, the average multiproduct household install size represents a $5 billion revenue opportunity. This highlights the long runway we have to further monetize our install base. I remain confident that Sonos is on the right track to continue to deliver value for customers and investors over the long term. There is no doubt in my mind that we will emerge from this challenging 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. Hello, everyone. Stepping back from the numbers for just a minute, I'd summarize Q3 as having two areas of intense focus. First, making sure that we deliver on the second half revenue guidance we gave on our Q2 earnings call. And second, making sure that we deliver on our expense reductions, both to ensure that we meet the profitability guidance we gave last quarter and to put us in a position to deliver our stated intention in fiscal year '24 to grow revenue faster than expenses and expand our adjusted EBITDA margin. We are on track to do all these things. Now for the Q3 results. We reported revenues of $373.4 million, up 23% sequentially and roughly flat year-over-year on both the reported and constant currency basis. Americas grew 8% year-over-year to be 67% of total revenue, driven by resilient consumer demand as well as a strong reception to our Father's Day promotion in June. EMEA and APAC each declined year-over-year to be 28% and 4% of total revenue, respectively. This was due to soft consumer demand consistent with the challenging economic climate in each region. We expect this softness in EMEA and APAC to continue through Q4. Though the shape of the second half is a bit different than we had anticipated. In aggregate, our expectations are unchanged from what we outlined last quarter. I'll discuss this further after I finish recapping this quarter's results. Quarterly registrations declined 2% year-over-year, while products sold declined 11%. This divergence with registrations outpacing selling is consistent with what we outlined last quarter about reducing channel inventory in the second half of the year. Favorable product and channel mix as well as focused price increases caused revenue to be roughly flat year-over-year despite the 11% decline in products sold. Q3 gross margin expanded 270 basis points sequentially from Q2 to 46% or 45.9% excluding the impact of foreign exchange, consistent with last quarter's guidance. This expansion was driven by a full quarter of some targeted price increases, lower cost of components, and favorable mix, partially offset by promotional activity and the reserves and expenses we have taken related to our component inventory that we currently deem to be excess. These reserves are included in our cost of revenue and thus hit our gross margin. This is a temporary consequence of sourcing components during a period of COVID-induced scarcity, followed by a period of slower demand. We expect to work the rest of the way through this gradually diminishing COVID overhang in mid-fiscal year '24. On a year-over-year basis, gross margin declined by 130 basis points due to lack of typical promotional activity in Q3 of fiscal '22, partially offset by favorable product mix and fewer spot component purchases in Q3 of this year. Adjusted EBITDA was $34.3 million, ahead of our expectations due to the combination of higher revenue and lower operating expenses. Foreign exchange was an approximately $0.7 million tailwind to adjusted EBITDA. Total non-GAAP adjusted operating expenses of $149.6 million declined by $4.4 million or 3% from Q2 due to delayed program in advertising spend and lower bonus accrual. Please note that the mid-June reduction had little impact on our Q3 expenses. And that this expense figure excludes the $10 million restructuring charge we recorded associated with the reduction. We ended the quarter with $268 million of cash and no debt. Free cash flow was negative $7.8 million in the quarter, largely driven by a $31 million increase in accounts receivable, an $18 million decrease in accounts payable and accrued expenses, and $15 million of share repurchases, partially offset by a $23 million decrease in inventories. Within inventories, finished goods were $240 million, down 13% sequentially. Looking ahead, our typical seasonality has its building inventory in fiscal Q4 ahead of the holidays. Our component balance of $58 million was up 12% sequentially. Over the last year, we moved swiftly to adjust our sourcing plan and our component purchase commitments. While we have made good progress, we still expect our component balance to continue to increase in the near term before reaching a peak sometime next fiscal year. As I said previously, managing our owned inventory and improving cash conversion remains a top priority. And finally, before turning to guidance, we repurchased $15 million of stock in the quarter at an average price of $16.10 a share, representing 0.7% of common shares outstanding as of Q2. As a reminder, we have approximately $55 million remaining of our previous $100 million share repurchase authorization. Turning to guidance. As I previously mentioned, our expectations for the second half of fiscal 2023 are largely unchanged from last quarter. Today, we are adjusting guidance ranges to reflect being three quarters of the way through fiscal '23, while maintaining the midpoint for revenue and adjusted EBITDA. We now expect to report full-year revenues between $1.64 billion and $1.66 billion, down approximately 6% year-over-year. At the midpoint, our guidance of $1.65 billion is unchanged from last quarter. We expect Q4 revenue between $290 million and $310 million, down between 2% and 8% year-over-year. Our Q4 guidance assumes that our Q3 promo overperformance pulled in some demand from Q4. And while overall demand in the Americas is resilient, we expect EMEA and APAC to weigh on our results. Taken together with our Q3 revenue of $373 million, second half revenue at the midpoint of our revised guidance is $673 million, unchanged from last quarter. We now expect gross margin to be in the range of 44% to 44.2%. The entirety of this revision is driven by higher excess component provisions. As a result, we now expect Q4 gross margin between 45.9% and 46.9%. At the midpoint, this outlook implies a second half gross margin of approximately 46%, modestly below the midpoint of our prior guidance of 47%. Absent this excess component provision in Q4, our gross margin outlook would be in line with the prior guide. To size this for you, the full-year impact of the provision is expected to be at least a 100 basis point headwind to gross margin. And as a reminder, we've also faced significant foreign exchange headwinds this year, adversely affecting gross margin by over 100 basis points as well. Excluding foreign exchange and the provision, gross margin would be well within our normal annual target of 45% to 47%. We now expect adjusted EBITDA to be in the range of $148 million to $158 million, representing a margin of 9% to 9.5%. At the midpoint, our guidance of $153 million is unchanged from last quarter. We expect Q4 adjusted EBITDA to be between $0 and $10 million, representing a margin of between 0% to 3%. Embedded in this Q4 adjusted EBITDA guide is non-GAAP adjusted operating expense of approximately $147 million in Q4, down modestly from Q3 due to realized risk savings and lower bonus, partially offset by the timing of program spend. Full-year non-GAAP adjusted operating expenses are expected to be approximately $623 million. Taken together with our Q3 adjusted EBITDA of $34 million, second half adjusted EBITDA at the midpoint of our revised guidance is $39 million, again, unchanged from last quarter. As Patrick mentioned, in Q3, we took the painful but necessary step of reducing our workforce by approximately 7%. We have other expense reduction initiatives underway as well. For example, continuing the process of reducing our leased office space. We recently amended our long-term lease in Boston, reducing our footprint by almost 50%. And in Santa Barbara, we will be giving up our two current office locations and moving to a new consolidated office space early in the second quarter of 2024. We will continue to review our expense base in search of further areas of savings; managing expenses and improving efficiency is of critical importance. We are in the throes of planning for fiscal '24. And while it's too early to provide guidance, I do want to double down on our commitment to delivering operating leverage in fiscal '24. We will provide further detail on this on our Q4 earnings call. Last but not least, let me touch briefly on our Google litigation. In our Northern California case against Google, the jury awarded us $32.5 million based on Google's infringement of one of our patents. Post-trial motions are currently pending. In Google's two pending cases against Sonos at the ITC, a hearing was held in one case with an initial decision expected in September. In the second case, the judge delayed the expected July hearing and indicated that she would be issuing an order finding the Google patents at issue there to be invalid. We expect a written ruling shortly.

Great job this quarter. I would like to direct my question to either Patrick or Eddie. Can you confirm that the strong performance in fiscal Q3 and the guidance decrease for Q4 are primarily due to heightened promotional activities, leading to pulled forward demand, along with some additional weakness in international markets? Are these the main factors we should consider for Q4? Additionally, how should we approach expectations regarding product registration growth or declines as we look towards the September quarter? Can you provide some insight into what trajectory we should be anticipating based on the reduced guidance? That would be very helpful. I have another question to follow up on this.

Thank you for your question. We have been focused on achieving our updated targets for the second half of the year, and we are pleased that we are on track to meet those goals. Regarding the balance between Q3 and Q4, you made a good point. Our Q3 promotional efforts were very successful and likely brought in some revenue that would have occurred in Q4. We anticipate some further channel tightening in EMEA and APAC, which you mentioned. Overall, we expect stability in the Americas, though we are seeing ongoing challenges in those other regions, reflecting the current economic conditions there. It's important to note that for the entire year, registrations have been outpacing sales, indicating that the underlying demand is actually stronger than our reported revenue figures. Our aim is to keep competing effectively while we await the recovery of our categories, which we believe will happen in due course. You summarized the situation quite well, Erik.

Thanks, Erik. Our strategy involves both improving our performance in existing categories, which is crucial for driving growth, and expanding into new categories. Both aspects of our strategy, including acquiring new homes and encouraging existing homeowners to make additional purchases, are essential for achieving our goal of $2.5 billion in revenue. As you mentioned, we'll keep details about our product roadmap under wraps for competitive reasons. Thank you.

This is David on behalf of Brent. Eddie, I wanted to start by discussing the litigation. I appreciate the information you just provided. I'm interested in understanding the path forward from here and what you all are considering. Specifically, what milestones should we, as investors, be monitoring? Additionally, how are you all approaching the situation? I recall you mentioning in the past that you believe Google is infringing on more than the five patents you've pursued. I'm eager for an update on whether you plan to revisit that and potentially introduce more patents in the future.

The next milestone will be the post-trial motions in the case we have won in Northern California. The judge is holding a hearing tomorrow, and we expect to receive a decision relatively soon after that. Following that, the next step will be the oral argument in the Federal Circuit regarding the appeal of the case we won at the ITC, which found five of Google's patents to be valid and confirmed that Google infringed on five of our valid patents. If we succeed in any way with our cross appeal, it could significantly benefit us. Once that appeal is resolved, the damages case for those five patents will start in the Central District of California. These are essential patents that Google has been infringing for a long time, and we have successfully defended them in litigation. That will likely be the next significant event. Additionally, we expect to receive a decision in the remaining case against us at the ITC, with an initial decision in September and a final decision in January. We are cautiously optimistic about a favorable outcome.

That's helpful. And then maybe just on the promotional activity. I know you guys have in the past talked about competitors being a little bit more aggressive on promotion activity. Obviously, you guys weren't promoting as much last year as you are this year. Just curious if you guys have found yourself maybe promoting a little bit more than you would like, just curious around that trend.

Our promotional strategy hasn't changed significantly. We promote at key moments when we believe consumers are most engaged with our products, and this approach has been very successful. Although we've increased our promotions this year due to their success, it hasn't meant we're constantly on sale. This strategy is working well, and I anticipate that we'll continue in the same manner as we are gaining significant market share in home theater both domestically and internationally. We've effectively resonated with consumers through our strong brand, focusing on these strategic moments rather than having frequent sales.

Thought the commentary on what's going out the second half shift has been really helpful. I'm curious if that changes your thinking at all for the holiday period? I know it falls into the next fiscal period. But just curious as we're getting a little bit closer to the holidays if there's any change in your thinking there.

No change in our thinking. We think we have a great product lineup and a good strategy that we're setting in place. But we can't tell exactly when that kind of cyclical issues in our space will turn. But we're going to be ready to excel at the moment that happens. Q1 is always a strong quarter for us, and we're looking forward to going through that again.

That's great to hear. I'm curious about your inventory levels, both for your company and in general. I appreciate your insights on the components, but I'd like to know how you feel about your overall inventory levels. Also, can you shed some light on your retail channel's inventory levels? Are we getting close to the end of the necessary destocking? Given the significance of the holidays for your business, is there any risk that retailers might need to reorder?

Sure. So look, we've brought inventory levels down by more than $100 million since the beginning of the year, and we feel good about that. But with a bit of a slowdown of demand, they're somewhat elevated still. We'll be building a little bit more into Q1 as typical for the holiday season. With respect to finished goods, we expect to return to a normal level exiting Q1. On the component side of things, we'll be taking a bit more onto our balance sheet as we exit from certain contract manufacturer relationships and also due to the aging of some inventory purchased during COVID and now held by some third parties. It's going to take us a little longer to work through that temporary spike in our own inventory, but we expect to do so in fiscal year '24. So a little bit elevated right now, a little bit of seasonality at work. But we will expect to be in very good shape next year on that. Now in terms of our retail partners, a little bit of a tale of two cities. In EMEA, our distribution pattern is much more diffuse, but we're definitely seeing some tightening there. We've already experienced a lot of tightening here in the U.S. BestBuy has got many fewer weeks of cover than they used to hold. That's fine. We have a great relationship there. But we've already seen a lot of the squeeze in that system. And as I said, that's why registrations have been outpacing selling all year long.

This is Mark on for Adam. Patrick, if I can start with you since you brought up Sonos Pro, it would be great if you can give an update on that. I understand it’s early days. But how's interest and have you learned anything since introduction that could help catalyze demand for Sonos SaaS offerings?

Yes, it is early days, like you mentioned, Mark. I think we're pleased with the customers that have adopted it and the interest that we've received. We haven't even really started to promote it yet, because we want to make sure that through marketing efforts that it's meeting the mark with the customers. It feels pretty good in terms of doing so. We think we have an opportunity there. We think we have some work to do as well to make it easy for customers to really adopt it even faster. But I think we're on the right path for addressing the needs of the customers we've targeted with that offering. We are going to continue to look for opportunities to add recurring revenue flows to our business wherever we can in a way that benefits customers. And so we recognize the value of those types of offerings, and we'll continue to work on that.

Okay. And then Father's Day strength has called out with promotional activity. So I was wondering if you could give a sense of linearity in the quarter. Are things better now versus if you look back in April? I understand that the Father's Day may have skewed the middle of June somewhat, but if you could kind of give us a sense of how things progressed throughout the quarter, that would be great.

I don't really have any more color for you on that other than to say what I said earlier, which is we do think that that did pull forward some revenue from Q4. So you can read into that. But that effect over time will dissipate.

Okay. And then I just wanted to circle back to the inventory topic. With our installer channel and retail partners tightening, can you give us a sense of what kind of inventory levels they're holding now versus what you consider historical norms by these different go-to-market avenues?

We don't actually give out those numbers. But what I would say is that by historical standards, the retail partners here in the States, for example, have definitely tightened. So it's to the point where we're very comfortable with where those inventory levels are now and that over time, registrations and sell-in will now balance out as opposed to registrations outstripping selling as it has all year long.

I believe the phrase I used is that it's gradually diminishing, and we expect to be completely through it in 2024.

There are no further questions at this time. Patrick, I turn the call back over to you.

All right, thanks, Emma, and thanks to all of you for joining. We look forward to updating you again in November.

This concludes today's conference call. You may now disconnect.