Started our clock, so I might as well start here. All right, good afternoon, guys. For those of you that don't know me, my name is Erik Woodring. I lead the hardware coverage here at Morgan Stanley. Before I introduce our speakers, let me just quickly—I don't even have it, do I? Before we begin, I need to mention that important disclosures can be found at Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. I'm delighted to be joined by two folks from Sonos today: Interim CEO Tom Conrad and CFO Saori Casey. Neither need an introduction. Given the time, let's just get right into things. Thank you first, both, for joining us. Tom, maybe if we start, can you just spend a quick minute or two introducing yourself, kind of walking through your background, and really maybe prioritizing what are your early priorities here as you step in as the Interim CEO at Sonos? Sure. Hi, everybody. It's nice to know that with Palmer Luckey down the way here, that I've got my digital music and audio people to prioritize that over killer attack drones, et cetera. I'm sure there's a bunch of interesting things happening there. I'm Tom Conrad. I'm the Interim CEO at Sonos. I've been in the role for six weeks. Today is day one of week seven for me. It's one of those situations where it feels both like seven days, but also seven years. Probably feels like seven years because I've been on the board for the last eight years. My relationship with the company goes all the way back to 2008, so almost 20 years ago, when my team and I at Pandora did the work that put Pandora onto Sonos. My background is sort of a mix of engineering and product design. I got my start at Apple working on the Macintosh. I was one of the creators of the Pandora music streaming service. Spent a decade taking that from literally eight of us in a garage to a public company, multi-billion dollar enterprise, and so forth. More recently, I was Vice President of Product at Snapchat, where I helped Evan for several years build out some of the defining features of the Snapchat platform, company public. More recently, I've been CEO of a digital health company called Zero. I'm at Sonos because I love this brand. I love the product space. I think we have tremendous, tremendous opportunity in front of us. I'm also here because the company stumbled last year. Job number one for me is to kind of right the ship and get the core experience of Sonos back on track, return to innovating in our space, and really help the company become operationally efficient again. We have a really big, interesting road in front of us. Cool. Oh, great way to start. I figured I'd address this topic early in this conversation so we can move on to other more exciting parts of the story. It's been, call it, 10 months since the Sonos app release from last summer. Can you maybe just help us understand where do we stand today? How long until you can declare that issue in the rearview mirror? What kind of guardrails are you putting in place? Just let's double-click on that and then move on. Yeah. I mean, it's such a complicated question to answer. It seems very simple on the surface. On the one hand, I want to sort of embrace the fact that anybody who has trouble using their Sonos platform today, yesterday, we want to fix the experience for them. There were people who had trouble using Sonos today and yesterday, I know for sure. The chapter that we're talking about is 10 months ago, we launched a new version of our mobile clients for Android and iOS that had some really significant performance and reliability issues. We have been working truly around the clock in the month of fall to kind of work on righting the ship. The reality is we have made tremendous progress. Today, when you look at the core metrics that we use to evaluate the performance and reliability of the system, this new generation of software performs better than the software that it replaced back in May. When you look at the features and functionality that the product affords to 99% of our customers, we exceed the level of capability of the product that we were shipping in the previous generation. Do we still have work to do? We do. I'll give you a couple of examples. There are features that less than 1% of our users use, things like advanced playlist manipulation that we're still working on bringing to parity with the old software. We have performance issues on some of our oldest players, talking about the Play 3, which we haven't sold for eight years. We are doing performance and reliability work to restore some scenarios for those users. I am very reluctant to declare victory on this. I think at some level, if you're passionate about creating great, delightful experiences for customers, this job is never done. But we have made a lot of progress in the last nine months. Cool. Good transition to dive into what initiatives you've put in place now as you've become the Interim CEO. First, obviously, there's a workforce reduction announced. Maybe high-level talking on the efficiencies, I'll ask Saori maybe a little bit more detailed on that. Also, you're making changes to go to market and engineering. What are some of the most important initiatives you've put in place now in your role? One of the things my background and experience brings is for big chunks of my career, I've been sort of a startup guy, taking companies from the earliest stage through young public companyhood. I think one of the ways that you find success in those chapters is just being really, really good at ruthlessly prioritizing and applying your resources to the highest value business opportunities that are in front of you. Coming in the door, as I looked at how Sonos was structured, it became pretty clear to me that we weren't really set up to do that kind of ruthless prioritization. In particular, the product organization, which is two-thirds of the company, had been organized into business units. We had a unit that was focused on plugged-in home experiences. We had another business unit that was focused on home theater. We had another business unit that was focused on the professional channel, portables, wearables, and so on. What that did was that it sort of encoded our roadmap choices into the org chart. If you're looking to be really efficient about how you allocate against the most valuable business opportunities in any given moment, you have to literally kind of move people from one org to another to double down, for example, on home theater. You'd have to take people out of their management structure in portables, say, and put it into home theater. The other thing that that structure did is it created a bunch of redundancies. You have mechanical engineering leadership across all of these different verticals than when maybe you could really more efficiently just have one mechanical engineering organization. We reorganized the product and engineering functions into what we call a functional matrix, where you have a sort of single organization around hardware, a single organization around software, quality, design, and so on. We are building these kind of durable but agile teams from across not just the engineering functions, but reaching out into finance, into marketing, into CX, and the other aspects of the company. We are already seeing that this is really helping us be more thoughtful about where we are placing our bets, how much resource we are putting against all of them. I am just really excited about how that is going to upgrade our efficiency. OK. That's perfect. Maybe last high-level question, and I'll ask this of you, Saori. Can you maybe just help us all better understand, if we pivot away from Sonos and take a high-level view, the demand backdrop that you guys are in right now? It's been a challenging environment for the better part of two-plus years. What are you hearing? What are you seeing from product registrations? What are your customers telling you? Really, the question is, is there a merging light at the end of the tunnel? How should we be thinking about it? Yeah. Thank you, Eric. Happy to be here. Actually, I was four weeks on the job when I sat here last year. Yeah, having had the opportunity to observe the dynamics of the market, certainly, as you said, the cyclical downturn on our audio market has been challenging to us. However, as we see some of our opportunities current and ahead, we do see some lights here. For example, Sonos hasn't certainly penetrated into every market opportunities. There are certainly markets that we have under-indexed in the past in our ability to go in. We're actually seeing, as we are starting to focus on those markets, those are growing double digits. They're a small base for us, but it's not small from a market size perspective. Like I said, we've been under-indexed. Those are opportunities that we see. Despite the fact that the cyclical downturn is still there, that's an opportunity we still have. Also, at the same time, products like Arc Ultra have given us the ability to also gain share even during the downturn of the market that we're in. We still see opportunities through our innovation and some of these market expansion initiatives that we have to be able to grow in a difficult environment. OK. Maybe let's use that and just quickly talk about the March quarter. You guided to revenue that's roughly flat at the midpoint, something I think you've taken from your previous experiences. You guide to quarters as opposed to years now. Maybe just as we think about the March quarter, what are some of the underlying assumptions you're kind of embedding when that comes to market performance, share shift, pricing, channel inventory, anything else? Yeah. Thank you. We really want to focus on getting it right. We have moved to the one-quarter guidance process. We are not embedding any speculation in what happens to the market during the course of the quarter, given it is not a very long duration to begin with. Certainly, we are taking into consideration the seasonality of our business. Our business certainly has a seasonality, with the holiday quarter being the largest, and that is just behind us. We have learned from that in the past. Certainly, there have been anomalies in our past year, same quarter a year ago, that distorts the year-over-year comparison in one way or another. Last year, in Q2 quarter, the March quarter, we had a channel inventory drawdown that we had done. In other words, we had to build more channel inventory in Q1, the holiday quarter last year than we had done this year. That makes the Q2 compare a little bit easier this year. We have taken that into consideration. We are also taking into consideration what is new about this year. We certainly have the benefit of Arc Ultra and the Arc coexisting at the same time. The demand for Arc Ultra has been better than expected, as we said about the December quarter. Also, Ace, our headphone, is incremental to last year since we did not launch that until Q3 last year. Those are sort of the new this year that we did not have last year. There are lots of puts and takes between last year's dynamics and this year. Those are contemplated into our Q3 guidance. OK. Cool. I don't want to get ahead of ourselves, but this was once a business that was compounding top line at 10% annually. Just as we think about what Sonos does, what Sonos will be doing in the future, is that still a rate that you think this company kind of can return to as an annual cadence? How do we think about the building blocks when we think about things like new households, product per household? Is that flywheel still in effect, so to speak? We do think there's still opportunity for this business to grow. As Tom indicated, really improving our core experience is job number one. That certainly is the most important thing that we can do to enable our flywheel in a bigger way than we are currently right now between the downturn on the market as well as the app launch from last year. We continue to believe the core experience being the foundation of it all. We have a number of other initiatives that we're looking into. For example, the geographic expansion that we talked about, where we're significantly under-indexing to the size of the market opportunities that we have. We do still believe there's plenty of opportunities. There are others like launching new products in our existing categories, like the home theater market, Arc Ultra as an example. That gives us the ability to gain share. We also have new categories like Ace that we've launched that incrementally give us the growth opportunities. We certainly also have the leaning on our strength of our relationship with our installers, where we still have a lot to go in both our product portfolio and partner expansions. Last but not least, we do think this cyclical downturn is providing us an opportunity to learn a lot from what pricing and the promotions do to our elasticity. It's not the same across all of our product categories. We're learning a lot from that to develop our pricing strategy to be able to not only grow top line, but grow the gross profit and maximize in a bigger way, as we still have a lot of pretty good, healthy margin from a product standpoint. Sure. OK. Maybe Tom, going back to you, you talked about some of the efficiencies, maybe breaking down silos within the engineering and product departments. How do we think about the product launch cadence as we think about the Sonos going forward? How does that affect the TAM that you guys are looking to plan? The prior goal was this kind of $90 billion global audio TAM. Frankly, the TAM could be half of that size, and you still have a ton of opportunity in front of you. Anything you can share on kind of the product side? Any hints? Anything that's interesting? Yeah. I think part of the narrative for the last five or eight years has been about these new product introductions are coming at a very specific cadence a couple of years. If you look at our recent history, we've been averaging two or more product releases a year, sort of the top-line goal for the organization. I think that's a great and healthy cadence for the business and certainly aspire to continue that momentum. I take a slightly different look about what we need to do. I think maybe if you're not careful, it's a little bit the tail wagging the dog. If the launches become the most important thing, the most important thing for me is to deliver exceptional, differentiated, enviable products that everybody who experiences them wants them for their own home. You want them to be great on their own, but you particularly want them to be great in concert with the entire Sonos platform in the home. Just getting back to that being the North Star, to me, is a big part of what winning looks like for us. Obviously, we fell way short of the mark on that front with respect to the software from last year. There is just a lot of energy in the company that is coming back to delivering these truly delightful, truly seamless experiences. I'll tell you, if I learned anything from the decade building and designing Pandora, it's that in the mainstream, when it comes to these audio experiences, the mainstream consumer, they do not want to think about it. They want to press one button. They want to be entertained. These are not people who make playlists and spend hours memorizing all the newest releases in audio. It's like friends are coming for dinner. Your spouse says, can you put some music on? That needs to be an exercise that takes a fraction of a second. You just think what you want to hear, and it's got to be playing. Same thing with the entertainment in your media room. That's the lane for us to execute in. How do we make the experience completely seamless? It reads your mind is how you want the customer to sort of express their relationship with the product. We've got a bunch of really exciting ideas about how we can get the product to that kind of seamlessness. OK. I do not want to necessarily take the attention away from kind of the core home audio market. Can you talk about maybe some adjacent markets that are ripe for disruption? Really, what I am getting at is you launched the Ace, perhaps not a great time in the cadence of things, but it was still a new kind of opportunity that you were going after over-the-ear headphones. What other markets that kind of exist that might look like that, that you guys think could be ripe for Sonos kind of stepping in and taking a second look? I mean, Ace is a really great example. It's a $5 billion-$6 billion market over-the-ear headphones. Our first-generation product is an exceptional product. I mean, it's the lightest, most comfortable headset. It's got the best noise-canceling performance and just is an incredible complement to the experience of Sonos in the home with innovative features like instantaneous swap from your media experience to an over-the-ear listening experience in the TV room. It is a good example, I think, of a product that stands on its own and is competitive with the very, very best products in the market. You bring it into the Sonos home, and then the whole thing just up levels. That kind of opportunity is, I think, a really, really interesting one for us as well. OK. Great. Let's talk about innovation. You acquired MIC in 2022. You just brought the first of that technology to market with the Arc Ultra. The Arc Ultra is outselling your expectations. Walk us through why this technology is so important for Sonos, the differentiation that it can bring for you, and if there are any other areas you can kind of hint to us where you're looking at technological innovation to drive differentiation. Yeah. I'd say, I mean, just to familiarize folks in the room with MIC, the state of the art for transducer design, the things that output sound from the speakers in your home, has been unchanged for, it's probably not an exaggeration to say, 50 years. This company that we acquired, MIC, has done some really foundational innovative work in completely rethinking how transducers can be used efficiently to drive certain kinds of audio experiences. I think one of the things that I've been so impressed by the team with in my first six weeks on the job is it's not just the folks that came in from MIC that are driving that kind of innovative thinking in audio. That's sort of in evidence sort of across the audio team at Sonos and really, frankly, across the industrial design teams and the software design teams, too. This is a company that I think has an incredible history of innovation. You have seen that our customers care about the MIC technology, as exemplified in Arc Ultra, easily the winner in calendar Q4, our Q1, in the whole home theater category. You will see us bring those technologies and other similar technologies from the same inventors to our products over time. OK. Great. Maybe last question before we move on to kind of costs and margins and capital return and that side of things. How should we be thinking about the competitive intensity of the AV market? We were just outside, and I was saying, I don't know what I would buy besides a Sonos at this point. Maybe where are you having most success versus competitors? Maybe conversely, outside of the app dynamics, areas that you could target, things that you could do better to compete? Yeah. Yeah. What we learned, even just in the recent quarter, when you have a great innovation like the Arc Ultra with the MIC sound motion technology, it really made a difference in being able to gain market share in our US home theater category. Conversely, we saw a fierce pricing competition in the holiday quarter for the portables market, where we did not play as aggressively. We saw that in the result of our share in that. That is making us think about where we really want to lean in and where we do not want to. As I referenced earlier about some of the pricing strategy that we really want to be looking into is to really maximize our gross profit dollars rather than just for the top line to gain share. If that's not generating margin expansion to our bottom line, that's not going to be a great business for us to be in. We are trying to be very thoughtful about that into our pricing strategy. OK. If I stay on you, one of maybe the most important initiatives that is in place at Sonos is your focus on cost efficiency. Tom, we heard it from you earlier. I realize the market backdrop hasn't necessarily worked in Sonos' favor. What drove the focus on cost efficiencies? Where are you finding efficiencies? What's kind of the financial impact that we should be thinking of from these efficiencies? Yeah. Certainly, as I joined a year ago, Sonos was in a state where it had expanded its investments in the anticipation of the trajectory that we were on during COVID. I think there was a hope of the market to turn around a little bit sooner than what we're experiencing now in hindsight. The need to right-size it, but it wasn't just reverse what we had done to expand it, but we wanted to do it in a way that puts us foundationally in a very scalable way. Tom brought up a great example of how he reorganized the product team. It's not just reducing headcount, but reorganizing in a way that is more scalable for the size of our company and be more nimble and more efficient. That's the way we're approaching not just the product team. We've done that for the G&A function, as you saw in the year-over-year expense level that has dropped, not in a traditional restructuring and reducing headcount, but fundamentally changing the cost structure, consolidation of tools, rate negotiations, and really de-layering in the organization to be more efficient and more nimble and structurally changing how we manage and how we run the company. Our work is not done. We have said the actions we have taken to date have given us a run rate of $60 million-$70 million of reduction. We're continuing to exhaust this to make sure that we're as efficient as possible to put every dollar into some of these growth opportunities that we see that we can serve well for both top line and the bottom line. OK. Just to follow up on that, just to be clear, when we think about the completion of the work that you have to do, how much maybe have you completed the bulk of that kind of transformation? Or do you have more work to do? How do we think about that? We do. We do. While some of the big restructuring is maybe behind us, there's still more work to do, and we expect to do that for the remainder of not only fiscal 2025, but well into fiscal 2026. There are a lot of things that take multiple years to do without being very disruptive to the company. We want to do it in a way where we're not sacrificing short term, but looking at it both short term and long term. We want to do that over multiple years to make sure that we can get the best results out of it. OK. If I take this kind of to the numbers for you, Saori, I'm first thinking about gross margins. I realize that all these actions aren't impacting gross margins, but there are things that you are doing within the product that impact gross margins. Same with pricing, same with mix. You have a very healthy mid-40% gross margin. What is kind of the long-term gross margin rate for this company? I realize the focus is on profit dollars. How do we think about the rate longer term as we think about it? We consider all these moving pieces. Yeah. Thanks for asking that. We've had in the past this goal of 45%-47% gross margin. We want to not be wedded to that target of the%. We want to maximize the gross profit dollars, which will flow through to the bottom line to expand our profitability overall. That is part of this pricing strategy work that we're doing to make sure that the elasticity is there to expand our gross profit dollars. We certainly are lucky to be in a position where our starting point is a very healthy product margin with the premium brand that we have. We really want to use that to our favor to be able to expand from here. We're not at zero. We still have 10 more minutes. We're just off on this clock. Maybe a similar question on adjusted EBITDA margins, because then we can take into account some of these other kind of OpEx efficiencies that you've been running through the model still have a bit to do. The target was 15%-18%. We have new people stepping into these leadership roles. I realize you might not have an official long-term target. Is there a way that you can help us all better understand kind of what that goal is for your adjusted EBITDA margins longer term? Is it still 15%-18%? Just anything that you could share with us about that. Yeah. I don't intend to give ourselves a target today, but we certainly can improve our profitability significantly from where we are currently, not least of which is the OpEx reduction efforts that we're doing, but in a most structural and effective way that scales and the gross profit dollar expansion at the same time. We do think over the medium to long term, there's a significant expansion that we can expect. OK. OK. At the end of the day, I'll bring this down to free cash flow. How to think about free cash conversion? I realize that free cash flow can be volatile. Anything you can share with us in terms of a rule of thumb or target we should all be thinking about in terms of what Sonos can do for either conversion or margins? Yeah. There's been a lot of efforts to improve our free cash flow and the working capital, and there's some great progress made. This is a business that we believe can generate a lot of great cash flow and the free cash flow in particular. It is not a capital-intensive business either because of our contract manufacturing strategy. We believe there should be an ongoing healthy way of generating free cash flow in which we'll deploy to be our capital allocation strategy. OK. Tom, if I turn back to you, I would ask Eddie the Bulldog Lazarus if he was here. Where do we stand on some of the various legal cases that Sonos has been involved in, especially the long-running case with Google? Is there any path to monetizing these investments that you've made as you try to defend your IP? Eddie the Bulldog Lazarus is our General Counsel and strategy. I would love to have the Bulldog here to answer the question, but I'll try to do my best. We have an incredible portfolio of intellectual property and have all kinds of ideas about how to leverage that in the business model over time. Have any big new news to sort of share today about what's been going on between Google and Sonos for the last handful of years? I'll just give you a quick update reminder of where the affirmative cases stand today. You might remember that we had a big victory at the ITC where our patents were upheld and Google was found infringing. The sort of mirror of that case for damages is now working its way through the system. The court has been briefed in Los Angeles. I'm going to go to trial on that shortly. You might also remember that we got a victory from a jury in Texas on a different set of patents. Again, patents upheld, Google infringing. In that instance, the judge overturned the ruling from the jury. We've, of course, appealed that. That'll be seen in the district federal court soon. OK. Let's turn to kind of capital allocation, capital structure. In addition to kind of the cash generation priorities, you already have a very solid balance sheet, $300 million of net and gross cash. At earnings, you announced a new $150 million buyback authorization replaces your prior authorization. One, let's just kind of layer in what are the priorities from a capital allocation standpoint. And then two, as we think about that pace of buybacks, what is the right pace? You've been doing about $25 million a quarter. Is that kind of the pace we should think about as we go forward as well? Yeah. Yeah. Yeah, we just announced our $150 million next generation of the buyback authorization from the board. We have not necessarily given ourselves a set amount per quarter. As you saw during our Q4 quarter last year, we did stop the buyback because we wanted to make sure we had better visibility into the business as we were trying to recover from the initial app launch situation. It is certainly part of our ongoing capital allocation strategy to repurchase shares and return that to our shareholders and use our balance sheet, as you say, in a most leveraged way so that we are able to continue to operate with a healthy cash flow that we have. OK. Maybe just high-level touching on M&A. Tom, I'd love to get your kind of view on philosophically how you think Sonos should, can, and will approach M&A as a tool. Sayori, from your perspective, just the relative attractiveness evaluations today. If I could just get both of your inputs on the M&A side, that'd be helpful. Saori, you want to start? Yeah. We historically have done more tuck-in type of M&A. Our balance sheet certainly affords to do that even in conjunction with the share buyback strategy that we have. That is something that we will continue to make sure we have room to do. MIC is a great example of where it was well utilized to really accelerate our roadmap and differentiate our product with innovation. We will continue to look into that. Yeah. I think for my part, there's been great opportunities for innovation that have come from even the small tuck-ins that we've done over time. We'll continue to look at those opportunities. At the moment, I'd say the energy of innovation inside the company is very strong. I'm excited about what we can build with it. OK. Great. Maybe just given we have about a minute left, I just, Tom, I feel like it's a fitting place to maybe end with where we started, which was there's things that you need to work through, but there's a light at the end of the tunnel. We're excited about what you can do from an innovation standpoint, putting your cash to work, working on efficiencies while still driving this company forward. Maybe what is the message you kind of want to send to us in the market about Sonos correcting past mistakes and really why you're so excited about the path forward? I guess it's as simple as even great companies stumble. What really separates us from will separate us from others is how we respond. I'm incredibly excited about the opportunity in front of us. We've got the best audio experiences in the world, the best industrial design in the world, the most enviable ecosystem in the world, and solve a bunch of big, interesting, hard problems for our customers. We are on a really, really great path to continuing to grow our footprint in the world and in the home. Awesome. I think that's a perfect place to end, Tom. Saori, thank you so much for joining us. Thank you. Thank you for having us. Awesome. Thanks, guys.