Sonos, Inc. (Nasdaq: SONO) announced today the long-awaited launch of its secretive new product targeted for a “multi-billion dollar category,” as Sonos CEO Patrick Spence is wont to remind us of frequently. One of the worst-kept, leakiest of launch secrets (probably intentionally so) in the industry, the company announced a new over-the-ear wireless headphone model featuring Dolby Atmos immersive sound and active noise cancellation called Sonos Ace.
But did the company Ace the test for turning around its deteriorating financial performance?
See more on the Sonos Ace headphone
Sonos calls Ace “…it’s most requested product ever.” Truthfully, I’ve yet to talk to a dealer who tells me that – yes, I contacted the company and requested they launch a headphone model – …or at least who would own up to requesting it. So perhaps this feedback is coming from their end-users that they sell directly on their direct-to-consumer (DTC) website…or perhaps their retail partners. Interestingly, as news of this product began leaking out all over the internet, the value of Sonos shares actually dropped on Monday, down 3.3%. This is not usually a good sign, as it suggests investors are skeptical.
Nonetheless, Sonos is sorely in need of a product win. Since fiscal 2022, its financial fortunes have been declining. As I recently reported, although Spence claimed Q2 of Fiscal 2024 “…exceeded our expectations,” the company reported a revenue decline of 16.9% and a 127% increase in net losses. For the first half of fiscal 2024, Sonos revenues have declined by 11.4% and net profits have collapsed by 75%.
In Need of a Spark
So, as I said, the company is definitely in need of some kind of spark to turn its business around and get back to growing again. And without a doubt, the company thinks that spark might be the new Sonos Ace headphones.
Sonos ACE is an over-the-ear, Bluetooth wireless headphone with lossless spatial audio via Dolby Atmos. The company says the drivers are custom-built for this headset for higher quality and fuller frequency response delivering a superior sonic performance. The Ace also incorporates Sonos Intelligent Motion Processing with Dolby Head Tracking that “dynamically adjusts the sound as you move your head for a hyperrealistic listening experience.”
Dolby Atmos for Sweeping Cinematic Sound
They’re here! Fans have asked us for years to bring the Sonos experience to headphones— and we knew our first foray into the category needed to champion the type of innovation and sound experience Sonos has become synonymous with. Sonos Ace leverages everything we’ve learned over two decades as an audio leader to bring stunning sound, sleek design and long-standing comfort to one of the largest and most popular audio categories worldwide.
Patrick Spence, Sonos CEO
Thanks to Dolby Atmos…the Sonos Ace delivers sweeping cinematic sound for a truly immersive experience, the company says. One cool feature that is exclusive to Sonos is that with the push of a button, the unit will automatically transfer movie sound playing on a Sonos Arc to the Ace – a neat trick for those times when your spouse, partner, or roommate is sleeping while you watch a planet exploding in space at full volume without interrupting their silence.
More Technology Updates Coming Later This Year
The company says that in a product update coming later this year, users will be able to add TrueCinema technology that “will map your space and render a surround sound experience so realistic you’ll forget you’re wearing headphones.”
Other features include active noise cancellation (ANC) to help silence any background noise interference, such as the constant drone of airplane engines in the background when traveling. While this feature is always helpful, it is especially so when making or receiving phone calls. The unit also has an “Aware” mode which allows you to switch to hearing outside information when appropriate, such as when you are in the office or walking on a busy street.
Long Battery Life, Quick Charge Capability
The company also claims an impressive 30 hours of listen/talk time, thanks to an extended energy-efficient battery life. Not only that, but Sonos says a quick 3-minute charge will yield another 3 hours of battery life via an included USB-C cable.
Sonos says the design of the Ace is “elegant” and will offer “long-lasting comfort.” Comfort is said to be enhanced thanks to the utilization of “premium…lightweight materials.” Memory foam helps the headphone to fit your head perfectly every time and with the custom headband and ear cups “that hide the hinge” they say you get a perfect seal with no catching or grabbing of your hair.
Sonos Ace Pricing and Availability
The headphones collapse down to perfectly fit the included travel case. They come in just two colors – black and white. I have to admit, I was expecting more of a colorful design flair from the company. They look fine, though not particularly unique or distinctive.
Sonos Ace will be available starting on June 5 and sells for an MSRP of $449.
Will Ace Spark a Return to Growth for Sonos?
But will Ace spark a return to growth for Sonos? There are several factors to consider in addressing that question. First, now that we know the design, the technology, the features, and the price…we can start to draw our own conclusions as to whether Ace is blockbuster enough to reignite an improved financial condition for the company.
Here’s a few things I noticed… Keep in mind that I have not physically seen or touched a pair of Ace headphones. I also have not listened to them. Both of these variables (design and performance) can have a big influence on market adoption. Anyway, here we go…
Headphones: A Big Market with a Lot of Competitors
First, Spence is correct that the headphone market (in its entirety) is huge. But there also is a ton of competitors, including those in the premium market segment which appears to me to be the segment in which Ace seeks to compete. Many of Ace’s features – such as Dolby Atmos Spatial audio, ANC, Aware mode, multi-microphones, custom drivers, and well-designed control layouts – are not unique to Sonos.
While I think the ability to push a button to switch the movie soundtrack from a Sonos Arc to the Sonos Ace is a neat idea, it’s kind of a specific use case.
Success is Not Guaranteed
To me, this feels like a decision that many companies have made, to try and boost their business by entering the headphone category…because, after all, it’s a big category. Many of them found the competition in the category to be fierce and success is not guaranteed. Some have even gone out of business trying to penetrate such a competitive category.
From the moment that Spence revealed that the company was pursuing a new category, he predicted that it would be worth $100 million to their revenues in 2024. He has continually reiterated that target amount of revenue contribution even as the launch date slipped.
I Create a Fictitious Year to Estimate the Impact of Ace Sales on Sonos Revenues
So I decided to do some quick calculations to see just how much of a help Ace would be to the company’s performance. Let’s imagine that Sonos Ace launched on October 1, 2023 – just in time to contribute to revenues for both Q1 and Q2 of Fiscal 2024.
I constructed a seasonality trend based on the most recent known results, the last four quarters. With that, I built a rough, back-of-the-envelope model in which the first half of 2024 had Ace in its numbers. That allows us to compare the impact with Ace and without Ace for the first half of the year.
Based on Company Forecast, How Would Ace Have Impacted First Half Revenues?
Spence is predicting $100 million in added revenues from Ace for the last two quarters of the year. Using a straight-line calculation, his projection implies that for a full year, the company would expect a $200 million or more contribution to revenues. So by applying the seasonality to this figure, we can construct a first half of Fiscal 2024 with and without Ace.
Breaking Down My Spreadsheet
So in the spreadsheet above, you see my rough calculation. The top line is Sonos’ reported revenues for each of the last four quarters. Really, I should have reflected the proper reverse order of that (as we are looking backward to the last four quarters) by labeling them Q2/2024, Q1/2024, Q4/2023, and Q3/2023 from left to right. But the numbers are correct for each quarter. The revenue figures are in thousands of dollars – except for the grand totals on the rightmost column.
Then you see my seasonality calculation – labeled “% of Total” where we find that the first fiscal quarter is the company’s largest quarter at 39.69% of the total year’s revenues. That makes sense since it runs the ninety-day period from the beginning of October to the end of December where all that juicy holiday consumer spending takes place.
Summing It All Up
Next, you will see my projections for revenues generated by Sonos Ace. Keep in mind that these are not my numbers, this is based on Spence’s overall projection of $200 million for a four-quarter period. And then you see the new total for the quarter with the Sonos Ace in the number.
I sum it all up at the bottom in the redlined section. The first half actual revenue for Sonos was $865.5 million without Ace. Adding this new product into the mix produces a total revenue of $977.6 million. This is a pickup of $112.1 million in revenues or +12.95%. This is all pretty much as the company estimates for the end of Fiscal 2024 – although my model suggests a number closer to $87 or $88 million.
Returning Sonos to Its Former Greatness
However, consider this…the above “with Ace” revenue total at $977.6 million is basically the same revenue (within 1%) that the company achieved in the first half of Fiscal 2023 at $976.8 million. And it goes without saying, that total was without Ace.
So I guess you can say that if Spence’s forecast is accurate, and some would say that’s a big if, Sonos Ace stops the slide in their financial results. Or perhaps a more generous way to put it is that Ace helps Sonos return to its former greatness.
Learn more about Sonos by visiting sonos.com.
Like you, I have never had a client ask me for a Sonos headphone. I wonder if the roll out of the new app was necessitated by the headphones?
Joe,
I very much suspect that the desire to get the headphones out caused them to cut corners and roll out the app update before it was ready…with a disastrous impact!
Ted
The ability to switch from the ARC to headphones (maybe same for other products?) sounds like something that would have required a software update. I wonder if the headphones release was being held up by the software update not being ready and pressure to get headphones to market caused the premature release of the software.
As far as the software problems, one might think they would have learned from the last update roll out (S2) that making all of your users mad at the same time is not a good idea.
Sonos has an enormous customer base. Will the addition of the Ace generate significant revenue? That depends on some issues. What percentage of their legacy consumers will purchase the Ace? You have to assume that many already own a headphone. Also, Sonos will have to expand the full integration of the Ace beyond just the Arc.
Personally, I have confidence they’ll succeed.
Years ago, I asked for a Sonos headphone that worked with their ecosystem. The reply back from the company (and the user community at that time) said it was both technically impossible (too much power consumption) and there was no market. Obviously a different story today.
But I think the bigger tale is how they botched the app upgrade. Maintaining both a S1 and a S2 network was clunky enough, but now trying to get to my large music library isn’t easy. They’ve got a big lift to get me back to being a happy customer.
Sonos IP was with their eco-system. Now they seem to have exhausted the eco-system, they’ve decided to make generic products with no unique IP (as such). Launching a generic headphone into a saturated market is a brave move. It demonstrates a lack of vision and perhaps a break in their strategy and long term vision. The corporate world is clearly desperate to bolster its stock price. The jury is out in this one…….
Anyone remember when Sonos had a campaign against Bluetooth technology? They later embraced the technology so much so as to sound like they invented it.
Anyone remember when Sonos put out a base version of the playbar? A year after the release of the play base a good majority of tv’s went from pedestals to feet. They missed the mark on this one by about 3 years or so, but claimed their base would be revolutionary.
I feel this is another product that for this company that is simply too late to the party. This is @ crowded field dominated by Apple Ear Pods. I know Sonos is looking to go after the likes of B&W, Bose etc but even those companies are chasing Apple.
Simply having a new product to sell to the 1 percenters will generate new found revenue that’s a given, but I don’t think it’s going to do what they hope, and Sonos should take care of the things they are more well known for like their app. Piss the everyday users off because you launch a glitchy app could be suicide.