Smart audio company Sonos has filed with the US Securities and Exchange Commission to go public. In doing so, the company warned investors of potential risk factors, such as Sonos’ dependence on competitors like Amazon, and US President Donald Trump’s trade tariffs, which might increase costs for companies like Sonos that depend on imports from China.
However, Sonos made some impressive claims about user satisfaction and loyalty, and it positioned itself as an attractive alternative to the walled gardens that competitors have built.
Sonos has not been profitable in the past, but the filing points out that it has closed the gap more with each passing year. The company claims that while this fiscal year is not complete, it has achieved profitability over the past several months. The filing lays out the numbers:
We generated revenue of $655.7 million in the six months ended March 31, 2018, an 18 percent increase from $555.4 million in the six months ended April 1, 2017. For the six months ended March 31, 2018, our net income was $13.1 million and our adjusted EBITDA was $50.5 million. We generated revenue of $992.5 million in fiscal 2017, a 10 percent increase from $901.3 million in fiscal 2016. In fiscal 2017, our net loss was $14.2 million and our adjusted EBITDA was $56.0 million.
Sonos also claims that it has sold 19 million products as of March 31, 2018 and that its customers listen to an average of 70 hours of content per month. Further, it says that those customers listen to “approximately 80 percent more music after purchasing their first Sonos product.”
The filing nevertheless warns that “we have a recent history of losses and expect to incur increased operating costs in the future, and we may not achieve or sustain profitability.” It also says that “the pace of our revenue growth has been volatile and we cannot assure you that we will continue to achieve consistent revenue growth.” (IPO filings seek to list all possible risks.)
But two outside risk factors drew the most attention from the business press and prospective investors. As worded by Sonos, they are: “we operate in highly competitive markets and we are dependent on partners who offer products that compete with our own” and “the imposition of tariffs and other trade barriers, as well as retaliatory trade measures, could require us to raise the prices of our products and harm our sales.”
Dependence on Alexa and Google Assistant
The first item refers to, among other things, new Sonos products’ dependence on services like Alexa and Google Assistant—both from companies that are competing directly with Sonos in the hardware space. The latter refers to the United States/China trade war.
Customers have already been burned by spats between companies like Google and Amazon. Google has ceased offering YouTube on some Amazon devices in the wake of a dispute that is centered in part around the fact that Amazon will not sell some Amazon-competitive Google hardware products in its online retail store. Sonos could theoretically find itself in a similarly consumer-unfriendly dispute at some point in the future.
The soon-to-launch Sonos Beam will support Amazon Alexa, Siri, and Google Assistant. But hypothetically, Amazon could pull the plug on Alexa support, even for Sonos products that are already in consumers’ hands.
What Sonos believes it has to offer users
The filing presented an opportunity for Sonos to describe the value it believes it offers to users. Some of its examples are obvious, oft-cited reasons to buy Sonos devices, like good sound quality and strong software. But others might be more surprising, like the fact that the company sees its audio products as alternatives to screen addiction.
The filing was accompanied by a letter from Sonos CEO Patrick Spense to prospective investors:
We’re tired of technology that pulls us deeper into our screens, deeper into distraction and deeper down bottomless feeds. Smart speakers offer a radical alternative: they give you exactly what you ask for. Take away the screen, and suddenly you have the freedom to look up and actually be present with the people around you.
The CEO’s letter also cited Sonos’ Swiss-style neutrality in the ongoing voice assistant and music streaming service platform wars, one of the most commonly cited reasons in audio forums and comment threads for buying a Sonos product:
One of the most foundational and enduring commitments we make at Sonos is our commitment to being open. The reason why is simple: we don’t want to limit our customers’ sonic world. We want to broaden it. So we’ve built a software platform that enables hundreds of partners and gives our customers unparalleled freedom… Our system is not—and never will be—an entry gate into a walled garden.
Consumers and users might appreciate that, but it’s a complicated path to navigate for a publicly traded company. Depending on how things shake out in the next few years, it could either be a huge advantage for weary consumers, an unraveling thread, or any number of outcomes between those extremes.