Promise of a line of products for outside the home welcomed by analysts who are worried about growing competition
Better-than-expected earnings and a teaser for a new product line sent shares of high-end speaker maker Sonos Inc. up 10% on Friday.
The company, which reported quarterly earnings late Thursday for the second time since going public, posted a smaller-than-expected loss and revenue that was about 10% higher than expected. Revenue was boosted by a strong launch for its Beam soundbar, a voice-enabled, smart speaker and music speaker that can enhance the sound quality of TVs. The Beam hit the market in July.
“Beam has and continues to exceed our expectations,” Chief Executive Patrick Spence told analysts on the company’s earnings call, according to a FactSet transcript.
In just a few months, the device became the leader measured by dollar share in the U.S. soundbar category, he said: “That’s unheard of for a $400 product. “
Sonos is confident heading into the crucial year-end holiday season that consumers are developing a taste for smart speakers, “and we kind of ride this wave that’s happening now around streaming music and all the activity that’s happening,” said Spence.
In its letter to shareholders, the company took aim at competitors who “flood the market over the holiday season” with cheaper devices that end up gathering dust in closets or drawers. Those products “do not meet the needs of Sonos’ target customer,” who tend to expand their Sonos systems over time and recommend them to friends.
The next frontier is developing a product to be used outside the home, where 50% of listening takes place.
“To be the leading sound experience company, we need to continue to offer differentiated listening experiences in the home while extending our platform and products to all the places and spaces our customers listen to the fantastic breadth of audio content available on demand today,” the company said.
On the call, Spence said Sonos has a three-year road map involving several products, one of which he expects to deliver in the next 12 months. The company also has high hopes for its partnership with home goods retail giant IKEA, which is now offering a home listening system using Sonos speakers.
Raymond James analyst Adam Tindle said he’s sticking with his outperform rating on the stock, praising strong upside to revenue growth and continued execution on cost, that helped drive a strong beat for adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization.
“Profitable growth has been a key theme for us, and guidance suggests this will continue as adjusted EBITDA should grow about 20% in fiscal 2019,” he wrote in a note.
“We see SONO as a stock in which solid revenue growth, stable gross margin, and an improved operating structure should lead to meaningful EBITDA growth, and these tend to be winners,” said Tindle.
At Jefferies, analysts welcomed a “quality quarter,” but added, “we think competitive pressures are increasing and more clarity around future product releases are needed to become more constructive,” they wrote in a note. Jefferies is sticking with its hold rating on the stock.
Analysts have repeatedly cited concerns that Sonos’ loyal customer base and upscale products are not enough to avoid the fate of other hardware companies such as Fitbit Inc. and GoPro, both of which have experienced volatility with shares since their hot IPOs.
Amazon AMZN, -0.28% is making a push up the quality spectrum and smart digital displays are emerging, they wrote. For now, Sonos has not been challenged in the premium category, but big tech is looking at the space.
“Without additional product launches to spur growth (outside of home especially) we worry that Sonos could lose some market share to lower priced competitors,” they wrote.
Stifel analysts stuck with a hold rating on the stock, and also cited worries about competition.
“Product sell-through and mix will be key in the December quarter and will set the tone for all of FY19,” they wrote in a note.
Sonos shares have gained 22.9% in the last month, while the S&P 500 SPX, +0.22% has gained 0.5%.
