Yahoo Finance Presents: Patrick Spence, Sonos CEO

Yahoo Finance Editor-at-Large Brian Sozzi sits down with Sonos CEO Patrick Spence to discuss supply shortages, the company’s new products, price points, and the state of tech.

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BRIAN SOZZI: Sonos CEO Patrick Spence, always good to get some time with you. One of these days, we'll get to actually do this in person. But nonetheless, good to see you as always.

PATRICK SPENCE: Good to see you too, Brian.

BRIAN SOZZI: So talk to me. Quarter just completed. What is the mood out there in consumerland compared to three months ago?

PATRICK SPENCE: You know, it's interesting. We've been hearing all of this noise, you know, in the broader kind of consumer sector and I know a lot of concern. But when it comes to our consumer for everything we see right now and based on the results you just saw, you know, our consumer remains strong. And so we're very pleased to bring out 20% year over year growth.

That's on top of a Q2 last year that was 90% year over year growth. We're still working through a backlog. We're noticing some new products. And our consumers continue to buy those products and want more products and, you know, continue to wait for the products that they can't get. So right now, from everything we see, Brian, our consumer is really strong.

BRIAN SOZZI: Yeah, I was one of those consumers, Patrick. I recently got a Move. So now I officially crossed the 10 speaker Sonos threshold in my one bedroom. Every time I talk to you, I seem to add another speaker. So yes, I've been out there in the market.

How are the retailers planning for the next few months? Before we know it, it is going to be the holiday season. Do you have that visibility yet? Are these guys planning now for some type of recession or growth slowdown?

PATRICK SPENCE: You know, it's interesting. So far, it doesn't appear that way. I think everybody's trying to be a little bit cautious in terms of how we're going through it.

But it's difficult when you also have those supply constraints, right? And so I think you've heard a lot this quarter from a lot of companies that are trying to build more products and really prepare. And the summertime is the time we build the products to get ready for that big holiday season.

And so we continue to plan, to build those and get ourselves prepared for that period. But from all our conversations so far, you know, people are expecting growth. They're expecting the consumer to remain strong. And so we're going to monitor it very closely. But yeah, at this point, it continues to appear that consumers are out there. And certainly when it comes to Sonos, that's what I can speak most directly to, they continue to buy and continue to want more.

BRIAN SOZZI: Have you just bang your hands on your desk at work when you see, I guess, prices for stuff to build your products? None of this stuff is coming down, Patrick.

PATRICK SPENCE: None of it's coming down at this particular point in time. I do think, you know, as China reopens, that's been a challenge and a short term challenge that I think will take some pressure off shipping and logistics, right? But we do expect the component issues to persist through the year.

And so we're paying a lot more for some of the components. We're having to switch components in and out. And so the team is doing an incredible job on that front.

It's a little frustrating, but I think the team's done an incredible job because we're still within our long term gross margin range of 45% to 47%. It's not as high as we thought it would be this year, but it's good to still be in that range. And so we're able to manage through it right now, you know, running a profitable business. So so far, so good in being able to navigate all of those headwinds.

BRIAN SOZZI: What type of price increases have you taken?

PATRICK SPENCE: You know, last September, we took about a 10% increase. And you know, we continued to see strong, strong demand for consumers. And so that's something that I think has benefited us in this particular situation. We've seen no impact on demand at this point. And so we feel pretty good about where we're priced right now.

BRIAN SOZZI: You mentioned the supply shortages, and you get mixed reads across different sectors. Some folks will say we are beyond the worst in the chip component perspective. Other folks will not say that. Where do you see it?

PATRICK SPENCE: Yeah, we expect it to persist. You know, we talked yesterday about the fact that this particular quarter, our Q3, is going to be-- you know, we see particular shortages around these components and chips in particular. So I expect it to continue through the balance of this year, and hopefully it gets better in 2023. But you know, I would take you back a couple of quarters.

There was a lot of industry speculation we get better in the back half of '22, and we're not seeing that right now. So I want to be cautious about that as well. Right now, our call is it's going to be challenging right through the year.

BRIAN SOZZI: Let's talk new products. I see that you have introduced several of them. What's the theme that ties them all together?

PATRICK SPENCE: You know, the theme is innovation at the end of the day and really, for the first time, some non-organic innovation as well, right? So we've got organic innovation that we've done and is really part of our heritage with both Ray, our new compact soundbar that really opens our home theater category to a whole new group of customers because they can get started at a lower price point. Then we also have Rome Colors, so really building on Rome and some playful stuff there, which we think will be perfect for spring and summer.

But on the non-organic side, we made an acquisition two years ago of a company called Snips in Paris, and we've introduced Sonos voice control now. And that really gives you an ability to control your Sonos in a private way. We don't capture any of your information, doesn't go to the cloud.

It's all done locally. And it's very Sonos-specific. So you can actually control your music, control your system in the way you would in the app as well.

And it's complementary to our partnerships with Amazon and Google. This is not to replace any of those broad-based voice assistants. This is very Sonos-specific. And we're very proud of the fact that it builds on an acquisition that we made as well. That's a first for us.

BRIAN SOZZI: What's the name on it? What's-- Siri, Sonos? How do I call this thing up?

PATRICK SPENCE: Hey, Sonos! And you're good to go.

BRIAN SOZZI: Fair enough. When you poll consumers and talk to consumers, is that's still one of the stumbling blocks here? They say we love Sonos products, but we just wish they were cheaper.

PATRICK SPENCE: You know, not really. We don't really get that feedback. Obviously, we're seeing demand we can't even fulfill at these price points.

And you know, now with Rome, we're at a $169 price point. With Ray, I do think now our home theater products coming in at the $279 price point actually open up some new possibilities for customers. We've also got the IKEA relationship, right, which gives you started as low as $99. So I feel like we have the right price points for our aspirational brand.

BRIAN SOZZI: Talk to us a little bit about software. I know you've started to, I would say, dabble. Maybe that's the right word, maybe it's not. But how do you see it, and what would be the evolution of that moving forward?

PATRICK SPENCE: Well, I think it's core to who we are, right? I mean, I always tell people we are the story of software eats audio, right? If we go back to Marc Andreessen's famous quote of software eating the world, so 2/3 of our engineering team is software.

The app gets 5 million sessions a month right now. And so, like, people are using that. They're engaging heavily.

And so that's an area that's very important to us. We believe-- you know, we've obviously built that and done some work with Sonos voice control in a new way with AI and ML that's in there as well.

And so, you know, we're very proud of our software efforts. We believe there's a lot of opportunity there. And I think there's opportunity, you know, in the future for value-added services for customers as well. And so that's something that we're very focused on as we think about innovation for the future. And it's a big, big part of where we go in the future.

BRIAN SOZZI: Do you think you had-- that Sonos has the right to play in [INAUDIBLE] streaming music and play more in a big way? And you've already sold a ton of this hardware to millions upon millions of households. Why not go on and take on a Spotify?

PATRICK SPENCE: You know, Sonos Radio is the third most listened to service on Sonos. So I think you're right that we've had, you know, customer engagement showing that they want to see what Sonos is bringing to market. We've just done a collaboration with Lorde that we're super excited about with the Solar System radio station in Sonos radio.

And so, you know, customers are, you know, really engaging in that but not at the exclusion of Spotify or Apple Music or Amazon Prime music or any of these great services. You know, there's room for both-- you know, a curated very focused service like Sonos Radio and then as well for those on demand services and what's happening out there. And so, you know, we're thinking about how do we partner, who does what well in the ecosystem, what are we good at to really complement the amazing hardware that we have today and also the partners in the ecosystem.

So we're always thoughtful about that and thinking about fundamentally starting with the customer and what they need. So if we see opportunities in that space, we'll certainly take them. But I think between Sonos Radio and then as well Spotify today, we've got you pretty well-covered.

BRIAN SOZZI: Indeed. Is this the year, no pun intended, that you step on the gas more with the car opportunity?

PATRICK SPENCE: You know, we are working on opportunities across the audio spectrum. You know, we'll do close to $2 billion in sales this year in a category that is $96 billion annually. That includes things like auto, headphones, some of these other areas.

And so, you know, we intend over the long term to play in all of these areas. You've begun to see our auto efforts with what we've done with Audi. And we've seen some five star reviews on that.

Customer feedback is very good. I think there's a lot of opportunity there. I think there's a lot of opportunity in other categories as well.

And so we're working on a whole bunch of exciting stuff both in the categories we play today and then categories we're not in yet. And so stay tuned for those things. You know, we like to talk about them when they're actually ready to go because we think that's the best thing for our customers.

BRIAN SOZZI: So you're not ready to tell me a launch date on the headphones.

PATRICK SPENCE: We can't wait to share our next innovations when they're ready to roll.

BRIAN SOZZI: You know I always try. I hear lots of things about-- all right, well, we'll leave it there. But let me get you on this one.

Before the interview, I was checking around our system. I saw a photo of you-- it had to be 15 years ago when you were at BlackBerry holding a BlackBerry phone. And it really reminded me that you've seen a lot of cycles in tech despite the fact that you and me both look, I don't know, late 20s, whatever it is. What do you think about this slide we are seeing in the market as it pertains to really well-known tech companies? Where are we at in this cycle, and what are people saying that is driving this?

PATRICK SPENCE: It's interesting. You know, I do-- you know, more broadly, I do think it feels more to me like 2000 and the dotcom bust, where it quickly went from growth at all costs to those companies that were building real businesses, right, and had profitable growth. And so that, to me, has been my general sense of it. I'm not as deep into the market and all the different companies as you are, but that's been my sense and kind of feeling generally as I've watched the sentiment, if you will, that's out there right now and why I think we're well-positioned since we've been focused on sustainable profitable growth since the start.

BRIAN SOZZI: Well, hey, the market liked your quarter. So clearly, you guys are continuing to do lots of things right. Sonos CEO Patrick Spence, always good to see you. Hopefully we'll do this in person next time.

PATRICK SPENCE: Thanks, Brian.