Sonos CEO details consumer demand, supply chain constraints, and new products

Patrick Spence Sonos CEO joins Yahoo Finance Live to discuss consumer demand, supply chain constraints, price increases, and the outlook for new products.

Video Transcript

BRIAN SOZZI: Sonos CEO Patrick Spence is staying hopeful on the outlook for his business, despite the economic growth slowdown and nagging component shortages. Here's what Spence told me on that front and the broader tech route.

PATRICK SPENCE: You know, it's interesting. We've been hearing all of this noise in the broader kind of consumer sector, and I know a lot of concern. But when it comes to our consumer, everything we see right now and based on the results you just saw, 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 introducing some new products. And our consumers continue to buy those products and want more products and 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 to 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 for some type of recession or growth slowdown?

PATRICK SPENCE: You know, what'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, 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 banged 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, 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, 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: Last September, we took about a 10% increase. And 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. We talked yesterday about the fact that this particular quarter, our Q3, is going to be-- we see particular shortages around these components, in chips in particular. So I expect it to continue through the balance of this year. And hopefully, it gets better in 2023. But 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: 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, and then we also have Roam Colors, so really building on Roam 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, a company called Snips in Paris. And we've introduced Sono's 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. It 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 hold consumers and talk to consumers, is that still one of the stumbling blocks here? They say we love Sonos products, but we just wish they were cheaper.

PATRICK SPENCE: Not really. We don't really get that feedback. Obviously, we're seeing demand we can't even fulfill at these price points. And now with Roam, 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 gets 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 will 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 Mark Anderson'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 we're very proud of our software efforts. We believe there's a lot of opportunity there. And I think there's opportunity 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.