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Sonos Tanks 23% as Audio Equipment Maker Suffers Demand Slump: Is an Industry in Crisis?

Shares of Sonos Inc., the California-based audio product pioneer, fell more than 23% in the extended session on Wednesday after the company posted better than expected second quarter results but cut guidance for the year citing a softening market with decreased consumer demand.

In its Q2 report, Sonos lost $31 million, equivalent to 24 cents a share, swinging from a profit of $8.6 million, or 6 cents a share, in the previous year’s quarter. Adjusted for one-time items, the company earned 4 cents a share. Revenue rose 10% to $387.4 million for the fiscal second quarter, compared with $348.7 million a year ago. Analysts polled by FactSet had expected an adjusted loss of 8 cents a share on sales of $380 million.

On a conference call following the release of the results, Sonos’ Chief Executive, Patrick Spence, said that the company had expected stronger demand during its fiscal second quarter, given the positive performance it had witnessed during the period. He also noted that while the company had enjoyed 11 years of double-digit growth, it had seen lower-than-expected demand this year.

Owing to the uncertain market conditions arising from the Covid-19 pandemic, Sonos has been forced to take a cautious outlook and has announced that it is withdrawing its financial outlook for the full fiscal year. Previously, the company had forecasted revenue to grow between 9% to 12% for the full year, posting figures of between $1.4 billion to $1.5 billion. Instead, it has now adjusted its outlook and expects revenue to be flat or slightly down in fiscal 2021. Aiding their financial performance, Sonos also reported that they are cutting costs across the organization to deal with the current fiscal year’s uncertain financial climate.

Sonos’ audio product lineup caters to a wide range of listeners and comprises wireless speakers, sound bars, subwoofers, and headphones. The company is also known for its audio products being compatible with different audio formats like 3D audio, hi-fi audio, and surround audio.

U.S. customers of Sonos have been flocking to its products in what the company described as the golden age of audio streaming on the back of advancements in AV technology, demanding not only a seamless streaming experience but also high-quality audio. However, the surge in demand for these products has been tempered by the recent slowdown in economic activity arising from the Covid-19 pandemic, forcing the company to re-evaluate its outlook.

The negative impact on the company’s financial position has been compounded by uncertainties around the eventual duration and scale of the pandemic. In a bid to minimize the financial implications and manage costs, the company has temporarily halted the launch of new hires, reduced advertising, and cut back on promotional activities.

Moreover, the ongoing chip crisis has affected the production capacity of Sonos as well as several other technology companies, leading to a temporary shortage in available inventory for its popular products. Consequently, the company anticipates temporary production interruptions in the next few months, which will almost certainly have an impact on the company’s financial performance.

Sonos’ future outlook is heavily dependent on how the Covid-19 situation unfolds and how soon the company can ramp up production in response to improved market conditions. The company remains confident in its long-term growth prospects and has a strong portfolio of products and partnerships to capitalize on emerging trends in the global audio market.

For now, however, investors are left with a weakened share price – down more than 23% in extended trading Wednesday following the company’s lowered guidance – and a period of uncertainty amid the backdrop of a global health crisis.

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