One Year From Software Fiasco, Sonos Can Still Carry a Tune
Sonos passed a rather ignominious anniversary this past week. At least the company celebrated in style.
When the maker of premium wireless speakers posted its fiscal second-quarter results on May 7, exactly one year had passed since a disastrous app upgrade.
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When Sonos launched the overhauled version of its app that customers use to control their product, it proved so buggy that many complained of being completely unable to use their systems. The update even marred the launch of the company's first headphones just a month later. It ultimately forced Sonos to call off other product launches and take down its financial forecast for the year.
Sonos is still working its way out of that hole. But the latest results were a good step in the right direction. Revenue rose nearly 3% from a year earlier to about $260 million, beating Wall Street's projections. The company also kept gross margins flat with the prior quarter at 44%—despite a step-up in production to get ahead of the tariffs President Trump announced just after the quarter ended. Sonos shares have jumped more than 16% since the report.
The stock is still down 42% since the new app launched, compared with a 10% gain for the Nasdaq in that time. So clearly Sonos still has a lot of work to do. That work is falling to Tom Conrad, the longtime Sonos board member who stepped in as chief executive in January. It has been a busy four months, with Sonos reducing its workforce by 12% and Conrad overhauling the organizational structure. That thinned out the layers, combining multiple hardware business units into one and centralizing the company's software efforts.
'It's pretty dramatic the progress we have made,' Conrad said in an interview. Software in particular remains a major focus—Sonos won't be launching any new hardware products for the rest of its current fiscal year as it focuses on making further improvements to the software. 'My bar is, the app has to be fast, reliable and easy to use,' he said.
Will it all work? The Sonos brand has certainly taken a hit, but the damage doesn't seem permanent, or universal. The company has called out strong sales of the Arc Ultra over the past two quarters, a $1,000 TV soundbar that came out last fall when Sonos was still dealing with the blowback from its app update.
And new customers are still coming in—at least at the right price. Sonos recently cut the price on its Era 100 by 20% to match the $199 price of its previous entry-level speakers. Conrad said the response so far has been strong, especially among customers new to the company's products. In a note to clients, Erik Woodring of Morgan Stanley said such moves could 'lower the friction of onboarding new users, which could pay dividends if successful, as the average Sonos household had 3.08 products at the end of [fiscal year 2024].'
Still, Sonos will have to pull off the difficult balancing act of repairing its brand and expanding its customer base while in the midst of a trade war. The company deftly moved most of its manufacturing out of China during the first Trump administration, but it still faces tariff costs related to its manufacturing bases in Malaysia and Vietnam.
Those costs could raise its expenses by as much as $10 million in its fiscal fourth quarter. That will leave Sonos with the same hard choice faced by other premium hardware makers like Apple: to raise prices or sacrifice profit margins. But building up inventory has bought the company some time. 'We have a lot of levers we can pull, and we don't have to pull them in haste,' Conrad said.
Today's Sonos knows all too well the value of getting it right the first time.
Write to Dan Gallagher at dan.gallagher@wsj.com
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