The past few years haven’t been kind to newly public hardware companies, but Sonos Inc. hopes to break from that pattern by relying on a little help from tech giants like Amazon.com Inc.
makes high-end speakers, and the company has tried to capitalize on increased interest in voice commands by giving its products “smart” capabilities. Sonos currently sells products that are compatible with Amazon’s
Alexa voice assistant, and Sonos expects its speakers to work with Alphabet Inc.’s
Google Assistant later this year.
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Adding Siri compatibility is a bit trickier, since Apple Inc.
services don’t generally play nice with hardware made by other companies. Sonos plans to introduce Siri on its speakers later in 2018 through Airplay 2, a sort of back door that allows Apple devices to stream audio to other devices. Sonos also has its own voice controls.
Investors looking for a pure play on the rise of voice assistants could get an opportunity in the coming months, as Sonos on Friday filed a prospectus with the Securities and Exchange Commission ahead of its expected initial public offering. The filing provided a look at Sonos’ finances, including more muted revenue growth compared with other recent IPOs as well as small net losses on an annual basis.
Sonos intends to raise up to $100 million through its offering, according to the prospectus, but that is typically a placeholder amount that will be updated in future filings. Assuming completion of the IPO, shares will trade on the Nasdaq under the ticker SONO.
Here are five things to know about Sonos and its plans to go public.
Mature growth profile
Sonos has been around since 2002, and that means it’s in a different place financially than many younger tech companies. The company hasn’t raised outside money since 2014, according to FactSet, and it’s on pace to generate $1 billion in revenue for the fiscal year that ends this September.
The company posted $992 million in revenue for its 2017 fiscal year, up from $901 million in 2016, making for a growth rate of 10%. Sonos recorded a $14 million net loss in 2017, compared with a $38 million net loss in 2016.
For the first six months of Sonos’ 2018 fiscal year, which includes the holiday period, the company generated net income of $13 million. Sonos was profitable in the first half of its prior fiscal year as well.
“They don’t need to show investors they have a path to profitability, but they do need an answer to the 800-pound gorilla,” said Phil Haslett, co-founder of EquityZen, an online marketplace for pre-IPO shares. That means Sonos will need to show how it plans to compete against devices from “diversified, cash-rich companies” like Amazon and Google.
Reliance on retailers
Sonos generates a majority of its revenue from physical retailers or their websites. Best Buy Co. Inc.
is its biggest distributor in the U.S., accounting for 16% of sales in the fiscal year ended last September, while Also Group is its biggest distributor in Europe, accounting for 12% of sales.
“Any time you have concentrated distribution for a product, that brings risk,” Haslett told MarketWatch. Potentially concerning is that Sonos generated just 45% of last year’s revenue from the U.S., which means nearly a third of U.S. sales came from Best Buy.
On the plus side, Haslett said that Sonos’ ability to build strong relationships with distributors in the U.S. and Europe bodes well for its likely attempts to do the same in Asia.
A loyal customer base
Sonos has proven able to drive repeat purchases from its customers. As of the end of March, more than 19 million Sonos devices have been registered by customers, and they’re in use in about 6.9 million households. The company said in its prospectus that 61% of households registered more than one device, and among customers who initially bought one Sonos product, the average person ended up buying 1.4 more.
The loyal user base is encouraging given that Sonos fetches high prices for its products. The company’s entry-level wireless speaker costs $149, and Sonos sells multiple items for $699. Still, there are obvious limits to how many speakers a household could reasonably need.
Sonos may end up annoying its loyal users in a bid to get them to buy more products, as it appears ready to stop updating software on some of its older speakers. The company lists among its risk factors the possibility of “customer dissatisfaction” if Sonos decides to stop supporting older versions of its products. Customers “have grown to expect” this support, according to the filing, but Sonos predicts “that in the near to intermediate term, this backward compatibility will no longer be practical or cost-effective.”
Breaking out of the hardware curse?
A hardware IPO calls to mind a few high-profile disappointments over the past few years, as shares of Fitbit Inc.
and GoPro Inc.
are both trading well below their IPO prices. The biggest success story has been Roku Inc.
which emphasized its “platform” business during its roadshow and now generates more than half of its revenue from non-hardware sources.
Is Sonos a Fitbit or a Roku? Perhaps neither. EquityZen’s Haslett pointed out that unlike Fitbit and GoPro, Sonos has been around for a while and its financials reflect a mature company. Investors in Sonos likely won’t be expecting massive growth the way early Fitbit investors were. Compared with Roku, though, Sonos doesn’t have an obvious path to becoming a platform-based business.
Simple voting structure
Many companies that have recently gone public have complex voting structures stemming from multiple share classes, but the Sonos filing shows just one class of shares. Investors haven’t been too turned off by dual-class structures in the past, but the straightforward arrangement at Sonos is, at the very least, not a negative.
As it relates to share distributions, Haslett is encouraged by the fact that current Sonos CEO Patrick Spence isn’t a company founder.
Sonos has “a diversified base of owners compared to one founder trying to retain a lot of control,” he said.
The largest owner before the offering is KKR Stream Holdings, with 25.7% of shares, followed by entities affiliates with Index Ventures, with 13% of shares outstanding.