Sonos Inc Q4 FY2024 Earnings Call

Thank you for joining us for the Sonos Fourth Quarter 2024 Conference Call. All lines are muted to minimize background noise. After the presentations, we will have a question-and-answer session. Now, I would like to hand the call over to James Baglanis, Head of Investor Relations and Treasury. Please go ahead.

Good afternoon, and welcome to Sonos' fourth quarter and fiscal 2024 earnings conference call. I am James Baglanis, and with me today are Sonos' CEO, Patrick Spence; CFO, Saori Casey; and Chief Legal and Strategy Officer, Eddie Lazarus. For those who joined the call early, today's hold music is from our holiday-inspired Sonos Radio station, Thankful. 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 fourth quarter and fiscal 2024 results posted to the Investor Relations portion of our website. As a reminder, the press release, supplemental earnings presentation, including our guidance and conference call transcript will be available on our Investor Relations website, investors.sonos.com. I will now turn the call over to Patrick.

Thank you, James, and hello, everyone. While fiscal 2024 didn't play out as we expected, I am proud of the way we adapted to address the challenges we faced and I believe we are on the comeback trail. Part of the difficulty this year stemmed from the fact that our categories continue to remain under pressure; something that we've now dealt with for the last three years and something that we continue to believe will improve at some point. And the other part was the way we mishandled the rollout of our new app. Life is all about how you respond to challenges and the team has risen to the significant challenge we faced, went all in on our app recovery efforts and made enough progress to enable us to launch our two new products in time for the holidays. And we've put a series of commitments in place to make sure this never happens again. The initial feedback and reviews on Arc Ultra and Sub 4 have been outstanding. When you combine this with Ace, our entry into headphones, a product that was just recognized as one of TIME's Best Inventions of the Year and add it to the rest of our industry-leading product portfolio, we now have the strongest lineup we've had in years. We continue to raise the bar with our recent product introductions. And I'd like to thank our customers, as they have stood by us despite the app misstep. We saw another increase in the number of products per home in fiscal 2024, the ultimate testament to the brand and the fact that Sonos remains the best home audio system in the market. I want to start by touching on three important areas of our app recovery efforts. First, of course, is the software. As our Chief Innovation Officer, Nick Millington, outlined in his blog post two weeks ago, we've made significant progress in bringing the quality of our software experience to a level that we are proud of. In fact, in the most important and impactful areas of the experience, like setting up your system, adding new products and ensuring reliable connectivity, our metrics are better than they've ever been, including when compared to our old app. And as we've said many times, we're committed to continuing to improve the software experience on an ongoing basis. The ease, reliability and magic of our products is the most important thing to us all. We've released 16 updates thus far and will continue this momentum in the months to come. Second, to build on all of these efforts and help us stay focused on what matters most going forward, we released a set of commitments that will ensure we continue to deliver the best wireless audio system in the world and our customers always enjoy the quality of which Sonos is known for. These include ensuring we always establish rigorous quality benchmarks at the outset of product development and not launching products before meeting these criteria, increasing the stringency of our prelaunch testing phases, introducing major changes to the app more gradually, appointing a quality ombudsperson, extending our home speaker warranties, relentlessly improving the app experience with regular software updates, and establishing a customer advisory board. We are confident these will ensure that we never make a misstep like this again. And finally, regaining the trust of our customers. Central to this process is making sure that the Sonos system is once again the easiest and most reliable in the world. That work is well underway and will continue intensely through 2025. We won't rest until that is done. But we are taking other measures as well. We've bolstered our customer service capabilities so that those customers who do experience issues can get the help they need more quickly. As the app improved, we provided a make-good program for the professional installers who have been inhibited from deploying Sonos products on their jobs. We've been deeply gratified by the response from this critically important distribution channel. And once we get through the holiday season, we'll deploy other tactics for restoring trust with impacted existing customers. We continue to believe our planned investment of $20 million to $30 million total is the right level required to successfully execute on our app recovery plan. Beyond the app rollout, the other challenges we faced in fiscal 2024 was continued pressure on spending on our categories. We have dealt with this unusual environment for the past three years and continue to believe this trend will reverse and get back to normal; though there is uncertainty that makes it difficult to predict exactly when that will be. And while these pressures have led to some of our competitors to take an aggressive approach to promotions, we saw continued market-share dollar gains in both US home theater and US streaming audio, which we believe is a validation of our brand and continued competitive differentiation. Fiscal 2024 saw us grow our base of active households to 16.3 million, which is critical to fueling our flywheel. Even in a year as challenging as fiscal 2024, our existing households accounted for 44% of product registrations, consistent with past years, and the average number of products in multi-product households grew to 4.42. We continue to make exceptional products that bring unparalleled experiences to our customers. I've often spoken about our product strategy of raising the bar in our existing categories while entering new categories in innovative ways. Over the last six months, we've done both. Arc Ultra and Sub 4 are great examples of raising the bar in our existing categories, while our Ace headphones represent our high-quality entrance into the exciting new category of premium over-the-ear headphones. After roughly six months in the market, we are starting to be able to assess how Ace is performing. Most importantly, Ace continues to be very well-received by customers and reviewers. It's an excellent product that can compete with anyone on comfort, sound, active noise cancellation and the other qualities that make for a great headphone. This is why TIME named Sonos Ace a winner for their 2024 Best Inventions list in the category of entertainment and gaming. As an added bonus, Ace offers our existing customers unique connectivity with our home theater product, which is perfect for enjoying your favorite content without disturbing those around you. A great endorsement to the quality of Ace, Best Buy chose eight strategic vendor partners to participate in their Theater District store layout, which highlights new and unique technologies sold at Best Buy. Sonos Ace will be featured on one of those end-caps ahead of the holidays in approximately 171 Best Buy stores, with another 50 stores coming in January 2025. Looking back on the launch of Ace, I'm confident we have proven our ability to play in this category that we have found that building momentum in headphones is just taking longer than we had originally anticipated. Some of that stems from the challenges with our rollout, but we've also seen unprecedented discounting and permanent price drops from the established players, which we believe has impacted sales. Overall, I believe there is good long-term opportunity for us in this category. As for the products we just announced, Arc Ultra is our first product to incorporate our revolutionary Sound Motion technology. When we acquired Mayht in 2022, we knew that their breakthrough transducer technology would be a key differentiator for Sonos. While devices like phones, flat screens and laptops have become increasingly slim, transducers, especially those responsible for producing bass, haven't scaled with this trend, leading to a reduction in sound quality for those devices, particularly on the lower-end of the hearable spectrum. Sound Motion addresses this limitation by making the transducer as much as three times smaller while producing more powerful sound. With Sound Motion technology added to Arc Ultra, the soundbar produces up to double the bass compared to our already impressive sounding Arc. This breakthrough not only improves the bass quality in a slimmer device, but also frees up room for additional transducers to be added to the product. This ability to combine compact design with high-quality, powerful audio is what Sonos sees as a fundamental shift in sound innovation. And we've only scratched the surface of its potential. With Sub 4, we've managed to improve on a truly iconic product. With revamped audio architecture, we upgraded its already amazing sound enhancement capabilities. And we've changed materials to make it both more premium in feel and better for the planet, thanks to more sustainable materials. Arc Ultra is being well-received by the ever-important tech press with early reviews calling it a significant upgrade, praising its sleek design, broad soundstage and impressive bass. PC Magazine awarded it the coveted Editor's Choice Award. Reporters have taken a keen interest in the innovation behind Sound Motion, recognizing our commitment to revolutionize the audio industry and imagining what comes next. Customers are responding in kind. Arc Ultra is rated five out of five stars and Sub 4 is rated 4.8 out of five stars on sonos.com. Another important product we announced in fiscal 2024 is the Era 100 Pro, which is our first-ever solution optimized for professional installation in light commercial and residential spaces. With the rich sound, elegant design and versatile control that Sonos is known for, Era 100 Pro brings simplified setup with power-over-Ethernet for a wired-first connection, versatile orientation via a pro-grade mount, and more customizable control with Zones, a new software tool to manage larger-scale installations. It was unveiled in September at CEDIA, where it was met with tremendous excitement from our professional partners. Their excitement has manifested into Era 100 Pro being nominated to the shortlist of Best Products in the Audio category at the prestigious Innovation Awards. The Era 100 Pro will be available exclusively through our professional installer partners starting on January 28, 2025. Looking back at the products we produced since going public six years ago, what becomes clear is not only a long tradition of exceptional quality, but also an effective effort to diversify our business mix to create a stronger foundation for future growth. As we stand here today, nearly all of our most important products have been introduced or upgraded in the last two years. Our investments in innovation have modernized the portfolio and resulted in the strongest lineup that we've ever had. This widens our lead over the competitors and sets a strong foundation to drive our flywheel in the years to come. We will continue to invest in innovation to drive future growth, but with an eye towards increasing our efficiency. In our postmortem evaluation of our challenges with the app rollout, one of the things that became clear was that we had spread ourselves too thin. Going forward, we will be focusing our efforts on the products and experiences that enable us to reach millions of new customers, while ensuring our existing customers have a great experience and add more Sonos products to their life. The focus is our flywheel and our transformational cost initiatives are integral to fueling the next phase of our growth. Saori will talk more about this shortly. To recap, we are making good progress on our app recovery efforts and there is more work to be done. We're focused on making this right with our customers and partners and we will not rest until we have customers raving about Sonos again. We announced some incredible products in the last year to add to our already strong product portfolio, all of which will be key to our success in fiscal 2025 and beyond. We are committed to showing the result of our significant investments in innovation. And finally, we are progressing with our transformation work, which will see us emerge as a more efficient, focused and disciplined company positioned to drive sustainable, profitable growth over the long term. I'll now turn it over to Saori to take you through our financials.

Thank you, Patrick. Hi, everyone. Fiscal 2024 was a challenging year for Sonos, but I'm proud of our entry into the premium over-the-ear headphones with the launch of Ace, and our team's resilience and dedication on our app recovery, which enabled us to launch great new products to further strengthen our portfolio. We also started to make progress on our transformational initiatives. These efforts will help build momentum to drive sustainable profitable growth over the long-term. Turning to the results. Fiscal 2024 revenues were $1.52 billion, in-line with our revised expectations as referenced in the last earnings call, we estimate the challenges associated with our app launch adversely affected our revenue by at least $100 million. Revenue in Americas and APAC declined 4% to 7% year-over-year respectively, whereas EMEA declined 17%. Our EMEA results continue to be significantly impacted by the difficult macroeconomic environment. On a channel basis, retail and other revenue declined 8% and was 55% of our sales combined. DTC was down 12% and was 23% of sales. Installer Solutions came in at 22% of sales, declining 4% year-over-year. GAAP gross margin was 45.4%, up 210 basis points year-over-year. This significant increase was driven by lower component costs and better inventory management, partly offset by higher promotional activity. Non-GAAP adjusted operating expenses were $634 million in fiscal 2024. There were a number of puts and takes impacting our expense base in the year, including higher marketing spend related to the launch of Ace, offset by lower bonus. This figure also includes approximately $4 million of app recovery investment. Adjusted EBITDA was $107.9 million, representing a margin of 7.1%. The year-over-year decline was driven by lower revenue, higher expenses, partially offset by gross margin expansion. We ended the year with $221 million of net cash, which includes $51 million of marketable securities as we hold some excess cash in short duration treasury bills. This was flat to FY '23 despite lower revenue and net income. Free cash flow was $135 million, an increase of $85 million from fiscal 2023. This result was primarily driven by working capital improvements resulting from focus on better managing our inventory through adjustments to our sourcing plans, as well as implementation of newly adopted payment terms with our supplier. Our period-end inventory balance increased sequentially to $232 million, consistent with the past seasonality as we build inventory ahead of the holidays. On a year-over-year basis, our inventory balance is down 33%. Our inventory consists of $200 million of finished goods and $32 million of components. We are working hard to keep inventories in check. In fiscal 2024, we returned $129 million to shareholders through repurchases and we have $71 million remaining under our current $200 million share repurchase authorization. While executing on our app recovery, which was a prerequisite to launch our delayed products, we paused share repurchases in Q4. Returning capital to shareholders remains a key pillar of our capital allocation framework. I'll quickly recap our Q4 results before turning to guidance. Q4 reported revenues were $255 million, which reflects $3 million of app recovery investments. Excluding this, we ended up close to the high end of our guidance range of $240 million to $260 million. Q4 reported GAAP gross margin came in at 40.3% or 41.1% excluding app recovery investments, which was right at the midpoint of our guidance range of 40% to 42%. Q4 non-GAAP adjusted operating expenses were approximately $143 million, which includes $4 million of app recovery investments in the quarter. The $12 million sequential decline from the last quarter was primarily driven by lower bonus. Q4 adjusted EBITDA was negative $22.6 million. Excluding our app recovery investments, which we estimate reduced adjusted EBITDA by $7 million, we ended up close to the high end of our guidance of negative $37 million to negative $14 million. Turning to our guidance, I would like to take a moment to discuss the changes we're making to how we provide guidance. Our new approach is reflective of our collective experience and lessons learned over the past few years. We need to be able to nimbly adapt to the uncertain market dynamics of categories while also focusing on our transformation initiative to optimize our investments to drive long-term sustainable growth. As a result, we will focus on providing quarterly guidance on our earnings calls. We expect Q1 revenue in the range of $480 million to $560 million, representing a sequential increase of 88% to 119%. The sequential increase in revenue from Q4 is a bit higher than past seasonality, primarily due to the launch of Arc Ultra and Sub 4. On a year-over-year basis, our Q1 guidance calls for a 22% to 9% decline in sales. This reflects a number of factors, including headwinds from the market weakness in our categories, ongoing challenges related to our app recovery and our proactive efforts to lean down our channel inventory overall versus last year, which is 5 to 7 points headwinds to our year-over-year growth. These headwinds are partially offset by having Ace and new generation of products in our lineup like Arc Ultra and Sub 4. Excluding the headwinds from channel inventory level adjustments, our midpoint calls for a 9% year-over-year decline in sales, an improvement from the 16% decline in Q4. We expect Q1 GAAP gross margin in the range of 41% to 43%, up sequentially from Q4, driven by operating leverage from higher revenue, partially offset by product mix. Please note that our guidance includes approximately 50 basis points year-over-year gross margin headwinds associated with the amortization of Mayht intangible assets now that we have begun selling Arc Ultra using the technology. As a result, we expect our Q1 non-GAAP gross margin to be approximately 80 bps to 90 bps higher than our Q1 GAAP gross margin. We expect Q1 adjusted EBITDA to be in the range of $35 million to $79 million. Please note that our adjusted EBITDA guidance has been reduced by $5 million to $10 million of app recovery investments we expect to make in the quarter. Our guidance assumes Q1 non-GAAP adjusted operating expenses to be approximately $182 million, which includes our app recovery investments. As Patrick mentioned, we continue to expect to invest $20 million to $30 million in our app recovery efforts. Inclusive of $7 million we incurred in Q4 and $5 million to $10 million we outlined in Q1, we expect the remainder to be incurred during the rest of fiscal 2025. Last quarter, I mentioned we had begun working on a transformational cost initiative. I wanted to outline some progress we made thus far and discuss where we will be focused on the remainder of fiscal '25 and into 2026. As a first step, we have taken multiple actions across various G&A functions to flatten and simplify organizational structures, which should enable us to be more nimble. We're also building our offshore capabilities and we'll continue our initiative to drive operating efficiency. The 6% reduction-in-force we announced in August was part of this work. As we make progress on our app recovery and holiday season activities, we will continue to expand our transformation efforts to R&D and sales and marketing to drive operating efficiencies and effectiveness, as an example of something we're already doing in partnering with Sierra AI to lower the cost to serve our customers while improving the quality of service delivered. We will continue to update you on our plans to improve our profitability and growth for the long term as we progress through the year. With that, I'd like to turn the call over for questions.

Thank you. We will now begin the question-and-answer session. Your first question comes from the line of Steve Frankel from Rosenblatt. Your line is open.

Good afternoon. So, Patrick, maybe we'll start with the fact that you added 1 million new households, which was a lower number than the last several years. How should we think about that relative to how much was tied to the app versus overall market environment or other factors?

Yeah. Thanks, Steve. I think you nailed it, which is I think we saw a slower pace this year, which is really more of the cyclical downswing, but there would be some of the app challenges in there, but I would lean it towards the cyclical based on kind of what we've seen, and what we've seen really over the past three years as we've gone through this. And one of the important things in that is I was pleased to see that existing households as a percentage of registrations was at 44%. So that's consistent with past years. And we saw continued expansion of products per household. So, I think the important thing to note is, we're in one of those more kind of challenged cyclical environments, and I think that'll change at some point, and we continue to see a good loyalty and repurchase from our existing customers.

And I know it's still early on Ace, and obviously, the app kind of knee-capped the launch, but what can you tell us about whether Ace was bringing in new households or has it turned out so far to be primarily an installed base product?

I believe Ace has been well received by both customers and reviewers so far. We're feeling positive about the product's performance. Best Buy has chosen it, along with seven other products, to be featured in its Theater District this holiday season, which is very exciting. Currently, we're seeing a good mix of sales from both new and existing customers. We see a big opportunity to engage our existing customers as we navigate this app recovery, particularly with the TV audio swap, especially now that we've introduced it for Beam and Ray along with Arc and Arc Ultra. While it will take some time, history shows that when we create a great product, which Ace appears to be according to the reviews, it will gain traction over time and becomes an essential part of our product lineup.

So, you would say that currently, the majority of purchasers are not Sonos customers?

Today, it's a mix. It's a kind of typical mix in terms of what we're seeing with the product. And I want to be mindful that we're early in the cycle with it. And I think holiday will be an important period to see how people turn out because that's a big, big headphone purchasing period.

Okay. And one more quick question. Any more detail on this make-good program for installers? Kind of what's involved there? And how do you think your relationship is now with that channel?

Yeah. So, myself and the entire leadership team were at CEDIA this year, which is the big event for our Installer Solutions partners. We got a ton of support there and I think they were very excited by the introduction of the Era 100 Pro and as well as some of the APIs that we did there. And so, we wanted to support them. And so, what we have done is basically put a program in place that helps them in terms of the amount of time it was taking to install given some of the challenges we had with app setup, around that. And so, we've put a program in place to support them through that. I think it was successful in going through it. And I think we are on the comeback trail with our dealers and they're standing by and supporting us.

Great. Thank you. I'll hop back into the queue.

Thanks, Steve.

Your next question comes from the line of Brent Thill from Jefferies. Your line is open.

Thanks, Patrick. Maybe you can just give everyone a sense of the software changes you've made to put a safety in around ensuring this doesn't happen again. And I'll follow up with another question.

We prioritized improving our software this quarter, and I'm happy with the progress we've made. Our metrics for the software are now better than they were with our previous app, particularly when it comes to setting up systems, adding products, and maintaining reliable connectivity. We've rolled out 16 updates, and the team is highly focused on these efforts. We've established rigorous quality metrics and are gradually making significant changes. Additionally, we have systems in place for addressing any issues that may arise, and I'm confident in our progress. The real measure of success will be customer behavior, and we're already seeing existing customers add more products over the year and continue to make purchases, which indicates positive momentum.

Okay. And then, the commitment to bottom-line EBITDA guide was decent. I guess, when you think about continuation of the bottom-line focus, maybe speak to what the levers are, and ultimately, where you're getting the most leverage to continue to push on the EBITDA line.

Hi Brent, this is Saori, and I can address your question. This is part of the conversation I included at the end of our earnings narratives regarding transformation. We began discussing this at the last earnings call, and I was able to provide more details this time. Our main priority now is improving operating efficiency through transformation. Several initiatives are currently in progress. For general and administrative expenses, we have taken steps that led to the restructuring and reduction in staff announced in August, but there are many other initiatives underway. For instance, the adoption of AI, which we mentioned, is aimed at enhancing customer service and efficiency. As we continue to focus on app recovery efforts and the upcoming holidays, we plan to extend our efforts into research and development as well as sales and marketing to ensure maximum efficiency and effectiveness, thereby achieving the best return on investment to ultimately enhance our profits. This is what we can share today, and we are definitely prioritizing this as one of our key initiatives once we navigate through the app recovery efforts.

Great. Thanks.

Your next question comes from the line of Erik Woodring from Morgan Stanley. Your line is open.

Great. Thanks so much for taking my questions, guys. Maybe, Patrick, can you just elaborate a bit on the efficiency measures you're alluding to? Not necessarily in the near term, but just like if we step back, what is changing internally, and how do you believe that will translate to better long-term financial performance? And embedded in there, can you just maybe touch on, do you still expect to launch at least two new products per year with this focus on efficiency, or does that change at all? And then, I have a few follow-ups. Thank you.

Yes, Erik, thank you. I believe we will continue to launch at least two new products each year. This involves evaluating the opportunities and the impact of the products we choose to develop, considering market trends, and ensuring we execute in the most effective ways possible. Saori has already shared some examples of how we've implemented this successfully in other areas of the company. We are currently working to enhance our effectiveness going forward. With each product launch, we learn more about what resonates with customers, which investments yield the best returns, and where the best opportunities lie, allowing us to leverage our strengths. All these factors help us formulate a strategy for making more effective investments, and we will provide updates on this as we progress. There is much more to share on this topic.

Okay. No, that's super fair. Thank you for that. And then, I realize you're still in a very tough kind of macro-demand backdrop. Can you maybe just elaborate to the extent you have the data on the linearity of demand through the quarter and into November? How you were able to work down channel inventory? What you're hearing from retailers about holiday season demand expectations? Just kind of like if you could put that broad mosaic together just in terms of how things might be changing, maybe a little more incrementally in the near term and how that shifted over the quarter, that would be super helpful. And then, I just have one after that. Thanks.

I had the opportunity to attend one of the Best Buy events and discuss the retail environment with many people. As mentioned in our prepared remarks, the audio segment remains challenging right now. Black Friday and Cyber Monday are significant for the quarter. Throughout the year, we've seen that promotional periods play a crucial role, and consumers are currently seeking discounts. Ultimately, our performance during that period is key. We're well positioned, and we've also engaged ambassadors in Best Buy and Costco to provide hands-on experiences with Sonos and our product lineup. We're doing everything possible to ensure a successful holiday season. This year, the time between Black Friday, Cyber Monday, and Christmas is shorter, which increases pressure, but we observed last year that shoppers were buying later than usual across the industry. We can expect this trend to continue, leading to a holiday season focused on promotions and discounts.

Okay. Very helpful. And then, last one. Just, Saori, I totally understand the shift in guidance and I realize you aren't guiding annually, but can you maybe just elaborate a bit on how seasonality might look different than this year than past years, obviously, given some of the ongoing app efforts, given some of the macro backdrop? Any high-level comments that you could make for us to help us think about the remainder of the year? And then, obviously, for the December quarter, the guidance ranges for both revenue and adjusted EBITDA are fairly wide. Maybe just help us understand what gets you to the low end of those ranges versus the high end of those ranges? And that's it for me. Thank you so much, guys.

Thank you, Erik. One reason we decided to shift to a quarterly cycle is due to the ongoing dynamics affecting the overall category decline, which hasn't stabilized yet. We want to remain flexible to respond to these changes. This quarter, we provided a wider guidance range because it's the Black Friday and Cyber Monday period, and we have Ace as a new addition to our product lineup, which we hope will perform well, but we will need to evaluate how that unfolds. We also launched Arc Ultra and Sub 4, contributing to the potential for a broader range of outcomes. We are closely monitoring our performance through Black Friday and Cyber Monday to determine how this will impact the remainder of the year, especially since Q1 is critical for us. We anticipate continued challenges this quarter from app recovery efforts and the ongoing category decline. Additionally, we are focused on reducing channel inventory to ensure we position ourselves strongly for the rest of the year, which is also reflected in the guidance we've shared today.

Your next question comes from the line of Alex Fuhrman from Craig-Hallum Capital Group. Your line is open.

Hi, everyone. Thank you for answering my question. From the full year metrics provided in the Q4 release, it appears that you added about 1 million new households in fiscal '24, which is a notable figure, although lower than the numbers from the past five or ten years. Can you share what that number was expected to be before the issues with the app arose? I'm interested to know if it was on pace to align with previous years prior to that.

We don’t provide additional details on that during the year; we typically give an update at the end of the year. What I can say is that, as you've observed in the past couple of years, the cyclical challenges in the category have impacted that figure. This year, some of the issues can also be linked to the app misstep, but this aligns with the overall challenges we've been facing in the category. That's the perspective I can share on that number for now.

Okay. That's really helpful. And then, if I could ask one more? Patrick, I think you mentioned you're bolstering customer service here to help with customers that are working through the app issues. Just curious as you look towards long-term growth, is this something that you think of as a temporary measure, or is this going to be something that's beefed up going forward?

A little of both, Alex. So, we've been beefing it up in terms of making sure we have things like weekend support, which is something that you'll see us continue. And we've been, as Saori called out, we've been working closely with Sierra AI and really on kind of, I would say, the future of customer support and how we are able to do that, leveraging AI in a unique way. And so, I think that puts us in a position where we'll be able to figure out how to do it more effectively and more efficiently over time as well. So, I'm pretty excited about delivering even better customer service and doing it in an efficient way. So, I think this has been a great example of innovation to help drive more efficiency and better service, which is kind of best of both worlds.

Your next question comes from the line of Mark Cash from Raymond James. Your line is open.

Yes, thank you. This is Mark on for Adam. Good afternoon. So, Patrick, in your prepared remarks, you mentioned competitors discounting and permanently lowering prices in the headphone market, but you sound pretty upbeat coming out of the Ace launch. So, I just kind of wonder if you can dig into what's driving confidence in the headphone market longer term?

Yeah, Mark, ultimately, I think it's the reception to the product from the people who have bought it, from the people that have reviewed it, from my own network of people that have bought it. I'm not sure there's been another product that I've had so many proactive texts and emails about once people have actually used it. And we've seen with our products over time that when we have a good product it does well over time. And so, I think it's a very competitive environment right now, but I also like the fact that Best Buy has seen it as something they want to help feature over the holiday period as part of the Theater District, right. So, I think that puts us in a good position. And with the tie-ins to our system through audio swap, I think we have a unique way to drive more with our existing customers, which is a really important part of our flywheel. So, those are the things that give me confidence and optimism around what we've done.

Okay. Maybe a follow-up on that. If we look at the $100 million impact from the app in the year, could you say how much that $100 million would be attributable to selling fewer headphones in the period?

Headphones?

No, we had commented a bit in terms of the $100 million being the app impact, but we're not breaking that down by product, Mark.

Okay. And then, just one more. You highlighted Era 100 Pro earlier, really interesting. So, I just want to ask about diversification efforts. You have Sonos Pro and Sonos Radio. So, could you talk about how those are tracking and when we might start to get incremental disclosures on those?

Those initiatives are still in their early stages, as we've discussed previously, and we're planning to try out various ideas to determine what works best. The Era 100 Pro stands out as we have successfully developed a product that will now be available in a power-over-Ethernet version for the professional market, presented in a more conventional product and hardware format. We have a solid grasp of the demand for this product, and there is significant enthusiasm from customers at CEDIA. However, the other projects you mentioned are still in the early phases of exploring and gaining insights into service-oriented businesses.

Clear. Very good. Thank you.

Your next question comes from the line of Brent Thill from Jefferies. Your line is open.

I have a question regarding the buyback. I understand why you might be hesitant to pursue buybacks during tough times, but it can often be the best option for capital allocation. If you believe these challenges are temporary and will be resolved quickly, why not increase your buyback efforts? Could you share your thoughts on this? I also believe you still have authorization for the buyback program. Is this situation just temporary, or how should we view it?

Thank you, Brent. Yes, we still have $71 million remaining from the $200 million authorization approved by the Board. We have not exhausted our funds. We are actively planning our capital allocation strategy and intend to move forward with it. We decided to pause in Q4 due to the app recovery efforts, which affected our ability to launch Arc Ultra and Sub 4 as scheduled. This uncertainty was a key reason for delaying those launches from Q4 to Q1, which wasn't clear at the start of the quarter. We felt it was wise to hold off while there was still volatility in that quarter. With those challenges behind us, we plan to adhere to our capital allocation process.

Okay. Great. Thanks.

And that concludes our question-and-answer session. I will now turn the call back over to Patrick Spence, Chief Executive Officer, for some final closing remarks.

Thanks, Rob. To close, I'd highlight three things. First, we've made good progress on our app recovery efforts and are on the comeback trail. Our customers have stuck with us, as evidenced by the fact that the products per home increased in fiscal year 2024. Secondly, we continue to deliver new products that customers love and rate highly, most recently with Arc Ultra and Sub 4 and before that with Ace. These are a direct result of the investments we've made in innovation over the past two years, and we now have the strongest product lineup we've ever had. And finally, we're committed to driving EBITDA growth. As you heard from Saori, we've begun transforming the way we do things to be more effective and efficient. We will continue to update you on our plans to improve profitability and growth for the long-term as we progress through the year. Thank you for joining us today, and I look forward to talking to you again next quarter.

This concludes today's conference call. Thank you for your participation. You may now disconnect.