Sonos Aktie

Thank you for standing by. My name is Angela, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sonos Second Quarter Fiscal 2026 Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. James Baglanis, Head of Corporate Finance. You may begin.

Good afternoon, and welcome to Sonos Second Quarter Fiscal 2026 Earnings Conference Call. I'm James Baglanis, and with me today are Sonos CEO, Tom Conrad; CFO, Saori Casey; and Chief Legal Officer, Eddie Lazarus.

Before I hand it over to Tom, I would like to remind everyone that today's discussion will include forward-looking statements regarding future events and our future financial performance. These statements reflect our views as of today only and should not be considered as representing our views of any subsequent date. These statements are also subject to material risks and uncertainties that could cause actual results to differ materially from the expectations reflected in the forward-looking statements. A discussion of these risk factors is fully detailed under the caption Risk Factors in our filings with the SEC.

During this call, we will also refer to certain non-GAAP financial measures. For information regarding our non-GAAP financials and a reconciliation of GAAP to non-GAAP measures, please refer to today's press release regarding our second quarter fiscal 2026 results posted to the Investor Relations portion of our website, investors.sonos.com.

After the call concludes, we will upload our revised supplemental earnings presentation, including our guidance as well as the conference call transcript, to the IR website. I will now turn the call over to Tom.

Good afternoon, everyone, and thanks for joining us. At the start of fiscal 2026, we said we expected to return Sonos to growth this year. Through the first half, that's exactly what we've done. We delivered $282 million of revenue in Q2, up about 8% year-over-year and near the top end of our guidance range. Gross profit dollars grew double digits on a GAAP basis, and adjusted EBITDA came in above the midpoint of our range. Saori will take you through the details in a moment. These are strong quarterly results, but what matters more is the broader picture. Across the first half and now looking into the second, we have changed the trajectory of the business.

After a challenging period, Sonos is beginning to grow again, and we are seeing our progress show up across the company. First-half revenue was up 2%, and adjusted EBITDA improved meaningfully year-over-year.

At the center of that progress is a simple idea. The Sonos system is the product. Each device we add and each improvement we make increases the value of the whole system, compounding over time as customers expand across rooms and use cases. That system-level value and the way it builds over time are what differentiate us in the category.

On our Q1 call, I outlined 5 dimensions we're focused on to drive durable growth: product innovation, customer advocacy, more intentional marketing, geo expansion, and tapping emerging demand trends.

Together, these form the engine that drives both new household growth and expansion within our installed base. We're starting to see the results of that work in the business. The product pipeline is delivering, growth markets are performing well, and the system is more reliable than it has been in years, which is helping restore customer advocacy.

Taken together, this has new customers entering and existing customers expanding into the system. I want to spend a moment on our newest product, Sonos Play. It launched just as the quarter closed, so its contribution to Q2 was de minimis. But the early reviews tell us something important about where we are as a company. Gizmodo called it a comeback. The Wall Street Journal described it as the Goldilocks speaker. The Verge called it a great way into the Sonos world. Bloomberg said, We're back on track. Reviewers around the world agree that it has crisp and beautiful sound, unmatched versatility, and beautiful craftsmanship. In short, Sonos is doing what Sonos does best. These glowing reviews were written independently across a host of markets and geographies as the launch embargo lifted. This remarkable consistency reflects both the quality of the product and the clarity of the story around it.

Over the past year, the product team has rebuilt the foundation, and now Colleen and our marketing teams are sharpening how we show up as a system, and you can see that work landing here. If you step back, Play illustrates 3 of our 5 growth dimensions working in concert. First, product innovation. This is differentiated hardware and software designed not as a stand-alone object, but as an entry point into the system and a reason to expand it. Second, marketing. The consistency of the global press narrative reflects a clearer and more coherent system story.

And third, customer advocacy. When reviewers start using words like comeback and back on track, that shift in tone is consistent with improving customer sentiment and the progress we've been making. Era 100 SL, which launched alongside Play, nicely complements the work Play is doing for us. With a simplified design and a $189 price point, it lowers the barrier to entry for the Sonos system. We've already seen that pricing changes on Era 100 have driven new customer growth over multiple quarters, and Era 100 SL should build directly on that momentum. We have more than 53 million connected devices across more than 17 million homes.

As we've described before, the opportunity within that base is substantial, moving from roughly 4.5 devices per multiproduct household to 6 represents about $5 billion in incremental revenue before even considering new household growth, and converting single-product households adds another $7 billion. We continue to see behaviors that underpin our model. Customers are entering through accessible products and expanding across rooms and use cases over time. And now we have 2 new ways to enter the Sonos system and more reasons for existing customers to expand inside and outside their homes.

Turning to our operations. I want to take a moment to introduce a meaningful addition to our leadership team. Frank Barbieri is joining Sonos as Chief Operating Officer. Frank brings over 25 years of experience building and scaling consumer businesses, most recently leading Walmart's omnichannel consumer content, media, and gaming operations across both stores and e-commerce, one of the largest entertainment portfolios in U.S. retail. I've known Frank for nearly 20 years, and his combination of commercial depth, operational discipline, and genuine passion for consumer products makes him exactly the right person to join our team.

As COO, Frank will take responsibility for partnerships, direct consumer relationships across DTC, CRM, and customer experience, as well as revenue systems and IT. This is a meaningful concentration of operational capability under an experienced leader, and I expect it to show up in how we execute against the growth agenda I've been describing.

All in all, we're carrying real momentum into the second half. Play has launched a strong early reception. Era 100 SL looks to be the right product for a moment when many potential customers are focused on value.

We have AMPMulti coming this fall as a much-anticipated product for our professional installer channel. More broadly, our pipeline remains healthy across not just hardware but also software, with a continued focus on deepening the system experience. In our growth markets, which I noted as a fourth important lever for our business, we've now seen multiple consecutive quarters of strong performance. Sonos Play's warm reception by the international press reinforces the vast opportunity in front of us. We continue to see our expansion markets as important contributors to our growth that will pay off more and more for us over time.

On our last earnings call, I suggested that we would grow more in the second half of the year than in the first. I'm pleased to say that we performed somewhat better than expected in the first half, and my view that the second half will be stronger yet remains unchanged. Amid this optimism, I want to highlight one challenge. Looking to the second half and beyond, we're managing the headwind of higher memory costs, which are putting downward pressure on our gross margin. As you know, the semiconductor industry is in the middle of a transition from DDR4 to DDR5 and high-bandwidth memory, driven by AI and data center demand. That is tightening the supply for the DDR4 chips we use and increasing costs across consumer electronics.

Our global operations team has been focused since early 2025 on securing sufficient supply to support our manufacturing demands. This means pursuing supply through multiple channels. We are also leveraging our engineering expertise to optimize memory requirements across current and future designs, all without compromising product performance or customer experience.

With regard to the effect of higher memory prices, we have a variety of levers to mitigate the impact. Our focus is on managing the headwind thoughtfully without losing sight of the larger opportunity to drive top-line growth alongside increased profitability. On the topic of tariffs, we will be filing for a refund of prior duties paid under IEEPA now that the U.S. Customs and Border Protection has launched Phase 1 of CAPE. While the timing is uncertain, the benefit could be as large as $40 million, which would be another meaningful offset to the higher memory costs.

So while memory headwinds are real, we are managing them from a position of preparation and expertise. Let me close with this. We've moved through a phase of stabilization. What comes next is building durable growth.

We're at an important point, and the signals are showing up across products, markets, and customer behavior. The product pipeline is active again. Growth markets are showing strong performance. The system is stronger, more reliable, and easier to understand. Our progress on the dimensions we discussed today, new products, more effective marketing, geo expansion, and a return to customer advocacy is beginning to deliver growth.

But the opportunity to grow into emerging adjacencies is what I find most compelling. AI is already transforming how we operate internally, from the way we build software to how we execute marketing to how I run the company, but the external opportunity is vast, 17 million households and 53 million connected devices, voice-enabled and present room by room. This is an installed base with significant value. And as more people look for experiences that don't depend on pulling out their phone, that value only grows. We're building towards something larger here. And while I'm not ready to lay out the full picture today, there is considerably more to this story, and I look forward to sharing it with you in time.

With that, I'll turn it over to Saori.

Thank you, Tom. Hi, everyone. We closed out the first half of fiscal 2026 on a high note with revenue growth of 2%, thanks to our strong Q2 results. This return to growth was accompanied by disciplined execution with 7% and 6% growth in GAAP and non-GAAP gross profit dollars, respectively.

GAAP operating expenses decreased by 16%, and non-GAAP operating expenses decreased by 10%. The combination of gross profit dollar growth and operating expense reduction resulted in adjusted EBITDA growing 48%, representing a margin improvement of 510 basis points. Q2 results overall came in strong against our expectations, marking our seventh consecutive quarter of executing against our commitments. Revenue grew 8% year-over-year to $282 million, near the high end of our guidance range, driven by APAC and EMEA growing 25% and 21%, respectively, while Americas grew 2% year-over-year.

Our growth markets delivered double-digit growth, further validating our view that this will be a key driver of our growth in the years to come.

Foreign exchange contributed 4 points to our year-over-year growth. On a constant currency basis, APAC grew 18%, EMEA grew 9%, and the Americas grew 1%. On a product basis, we saw continued strength in the demand for Era 100 as well as strong performance of Arc Ultra. As a reminder, both Play and Era 100 SL had negligible contributions to Q2 revenue given the timing of their launch.

GAAP gross profit of $125 million grew 10% year-over-year, while its non-GAAP gross profit of $130 million grew 6%. The growth was driven by higher revenue and FX favorability, partially offset by higher memory costs. GAAP gross margin was 44.3%, and non-GAAP gross margin was 46%. Higher memory costs were approximately 200 basis points of headwind to gross margin, whereas tariffs like last quarter were offset by our mitigation actions. Q2 GAAP operating expenses of $156 million decreased 11% year-over-year, primarily due to the significant restructuring costs associated with last year's reduction in force, while non-GAAP operating expenses of $137 million were mostly flat to the prior year and a bit below the midpoint of our guidance range.

Stock-based compensation was $14.9 million, down 36% year-over-year. Adjusted EBITDA was positive $2 million, above the midpoint of our guidance range, increasing $3 million from negative $1 million last year. This is an important milestone as this was our first Q2 with positive adjusted EBITDA in the past 4 years.

Non-GAAP earnings per share of negative $0.02 was up from negative $0.18 last year. We spent $40 million on share repurchases in Q2 to buy back 2.5 million shares, reducing our share count by 2.1%, which leaves us with $65 million remaining on our current share repurchase authorization. Our balance sheet remains strong as our net cash balance ended the quarter at $249 million, which includes $49 million of marketable securities.

Our period-end inventory balance of $161 million was up 16% year-over-year, driven by new product launches and tariff costs, partially offset by the workdown of component inventory. Our inventory consists of $144 million of finished goods and $17 million of components. Q2 free cash flow was negative $70 million, consistent with typical Q2 seasonality. CapEx was $5 million, down from $6 million last year.

Turning to our guidance. The Q3 outlook we're providing today reflects the trends we have observed quarter-to-date and is our best estimate. We expect Q3 revenue to be in the range of $355 million to $375 million, representing growth of 3% to 9% year-over-year, up 6% at the midpoint.

Our guidance represents modest year-over-year acceleration from Q2 on a constant currency basis as we expect FX to have a negligible contribution to growth in Q3.

Please note that there will be no revenue contribution from App Multi in Q3, which is slated to launch in the fall. We see continued momentum into Q4, driving a stronger second-half performance and delivering full-year growth consistent with what we have communicated over the past 2 quarters. We expect Q3 GAAP gross margin to be in the range of 42% to 44.5%, with non-GAAP gross margin approximately 150 basis points higher than GAAP, both roughly flat year-over-year at the midpoint.

Our guidance implies mid-single-digit growth in gross profit dollars at the midpoint, in line with the revenue growth. Please note that our gross margin guidance range embeds an approximately 400 basis point year-over-year headwind from higher memory costs in Q3, roughly 200 basis points more than Q2. We also do not expect to receive any tariff refunds during Q3. We're not guiding beyond Q3 at this time, but to provide some color, we currently expect memory cost inflation to rise from Q3, which is likely to pressure gross margin in Q4. As a result, we currently expect both GAAP and non-GAAP gross margin for the second half of fiscal 2026 to be somewhat lower than the second half of fiscal 2025, which was 43.5% on a GAAP basis and 44.9% on a non-GAAP basis.

As Tom mentioned, we're actively working on a variety of mitigation actions to navigate this industry headwind. We are focused on managing this challenge thoughtfully and without losing sight of the larger opportunity to drive top-line growth and increase profitability. While any tariff refunds received in the future would likely be a benefit to gross margin, the second-half commentary I just outlined does not incorporate any such benefit, given the uncertainty around timing. We expect Q3 GAAP operating expenses to be in the range of $150 million to $160 million. We expect non-GAAP operating expenses to be lower than GAAP by approximately $18 million, implying non-GAAP operating expenses stay roughly flat to Q2 at the midpoint.

Looking beyond Q3, please note that our OpEx will vary quarter-to-quarter in part due to the timing of our product launches. Bringing it all together, we expect Q3 adjusted EBITDA to be in the range of $20 million to $48 million, representing a margin of 5.6% to 12.7%. Our performance in the first half proves that we have built momentum. This was our third consecutive semiannual period of revenue growth improvement, and we expect to sustain this momentum into the second half of this year, making fiscal 2026 the year that Sonos returns to top-line growth.

Looking beyond fiscal 2026, our focus remains on delivering durable top-line growth while balancing continued profitability improvements and disciplined reinvestment. To that end, through the adoption of AI, we're starting to see significant improvements in our team's productivity across a variety of functions, including software engineering, IT, accounting, customer support, and many more. We believe we're just beginning to scratch the surface of harnessing the potential of AI to continue to improve our efficiency and accelerate our business. After the call, we will update our earnings slides to reflect our Q3 guidance and the second-half commentary.

With that, I'd like to turn the call over for questions.

[Operator Instructions] And your first question comes from the line of Steve Frankel with Rosenblatt.

Tom, I know you're reticent to talk about this AI modernization strategy. But maybe just at a high level, give us some thoughts on, is this a plot to try to create a recurring revenue business? Or is this a bounty-driven business like Roku started with? How should we think about the monetization of AI services from third parties?

Steve, thanks for joining the call. Just to frame this out at the highest level, as I said on the call, there are 2 different pieces of how AI is intersecting the business, of course. It's just profoundly transforming how we operate inside the company, how we build software, how we market, and how I personally run the business. But Sonos is really, I think, uniquely positioned with respect to how we can integrate AI technology into consumer-wise. A lot of other companies are asking, how do we move AI off of phones and computers and bring these experiences into people's lives in new and seamless ways.

At Sonos, we already have that path, 17 million households, 53 million connected devices that are voice-enabled and present as you navigate through your life, room by room. That's really a head start that nobody else can buy. And as much as I would like to get into the specifics of the product road map and the business models that will underpin our expansion into those adjacencies, I think it's premature to get into those details today.

I can't blame myself for trying. So, on the memory issue, I clearly understand the rising cost pressure. Where are you in ensuring that you have adequate supply given the new product ramp in the back half of the year? Are you comfortable that you have enough product at your disposal?

Yes. We're feeling really good about supply. Our global operations team started doing the hard work of securing sufficient supply through multiple suppliers, going back as early as the beginning of 2025. And so, as you see us guiding to 6% growth at the midpoint for Q3, we're obviously confident that we're going to have sufficient supply to meet the growing demand for Sonos products. So all these macro headwinds that get thrown at you are always an interesting challenge. I really do feel like we're operating from a place of both preparation and strength.

And then lastly, congratulations on the 100 SL. Do you see this as an attempt to get an even lower price point to grow the installed base?

Or does a device without a voice agent is that something that either appeals to a different class of customers, or make sense in a multiunit house where you don't need every response you have to have a voice agent inside of it? And what's the theory there?

Yes. I mean, Era 100 SL is a really exciting product, I think, because it is so well matched to the moment when consumers are really shopping for value, while at the same time, Sonos is looking to accelerate the acquisition of new households. And so having a product that at its MSRP can sell for only $189, I think, is just a really great addition to the line. I think the thing to understand about what we've done with Era 100 SL is that this is a no-compromises cost-optimized product from top to bottom. So not just removing the microphones and the speech capabilities, we've done all kinds of interesting work to bring our cost down on this product.

Just to give you an example, most of our products are painted, and Era 100 SL, we've been able to use color injection molding, so we don't have the extra expense of paint with no noticeable change to the product's fit and finish. And so just the global operations team at Sonos continues to do an incredible job of finding ways to deliver the same premium experience we have at lower and lower price points.

And you certainly touched on all of the dimensions that are at play when you think about a product without microphones. So, of course, there are consumers who prefer not to have microphones as part of the offering.

Of course, there are customers who are highly price sensitive who prefer to save money. And there are rooms and use cases from surround satellites to secondary rooms in the home where you might not want to have a microphone. So really exciting product for us. It's the quiet sibling to Sonos Play, which has received such glowing reviews from the press, but we're really excited about what it will do in terms of our strategy to bring Sonos to more and more households.

Your next question comes from the line of Erik Woodring with Morgan Stanley.

This is [ Ralph ] on behalf of Erik. I was wondering if you could just walk us through, maybe some of the scenarios or the moving parts that get you to the high end and the low end of your 3Q gross margin guidance range? And then I'll just have one follow-up after that.

Thank you for your question. Yes, we can walk through the Q3 guidance. So we guided to 42% to 44. And the range comprised of certainly the memory cost headwind, being sequential, let me just start sequentially. Sequentially, we have memory headwind that we talked about, an additional 200 basis points, and on top of the 200 basis points that we experienced in Q2.

And then offsetting that is that we do grow our revenue sequentially. So we have leverage that is going in our favor. And then on a sequential basis, we'll have now tariff at the new lower rate at 10%. So tariff will also be a tailwind for us, helping offset some of the memory mitigation. And then there are other moving parts, as you say, of a mix of our products. And when we sell our products at what promotion during the course of the quarter, and those are some moving parts that will get us to a different part of the range in our guidance range that we just gave out.

On a year-over-year basis, we talked about memory being a 400 basis point headwind versus last year. And then we have the tariff that we were experiencing, but with the mitigation actions that we have taken, we will end up being net slightly positive, given the reduction in the tariff rate. And then the ongoing cost-saving efforts that we're making, as well as the leverage that will be a partial offset to this 400 basis points of memory headwind that we're experiencing.

And just my second question here would be, I know you target consumers interested in your premium experiences among other categories. So I was just wondering if you could share with us whether you're seeing any changes in demand, particularly just considering the ongoing geopolitical conflicts we're seeing today that might have impacts on how consumers are thinking about where they're putting their dollars.

I would just say that we're really excited about the demand picture for Sonos in the market. It's certainly what's driving our growth as we go into the second half. We're also really proud of the way that we've expanded the portfolio to take advantage of the value-conscious customer with launches like 100 SL and even Sonos Play, which has such a flexible set of use cases that it can solve for, you just get a tremendous amount of value in that single product. So obviously, we continue to keep an eye on the macro, but I'm feeling good about where demand is for Sonos.

Your next question comes from the line of Brent Thill with Jefferies.

Tom, just on the second half gets a stronger thesis, maybe if you can underscore what you're most excited about? What are the stepping stones for that continued improvement?

Well, we're certainly excited to have Sonos Play and Era 100 SL in the market. And I think we're really starting to see the growth dimensions that I've been talking about on the call starting to stack together. So, product innovation through our new product offerings, more intentional marketing, telling the system story of Sonos, thanks to the great work that our new CMO, Colleen DeCoursey, is doing. We're many quarters into strong performance for our geo expansion investments.

And then finally, we are, I think, starting to see the tailwind of a return of customer advocacy after a period of repair and stabilization. And I think the best way to see that externally is the way the press is talking about our new generation of products, really talking about it being a comeback moment for Sonos.

And I know you've made some changes in the marketing group. I'm curious, maybe it's too early to see so far from our side, but what steps in terms of improving awareness building are you starting to take? Or are you hearing that's starting to resonate even stronger now?

Yes. So Colleen has been with us for about 6 months now, and she's putting together a marketing organization that is really aligned with our system strategy and building the muscle of being able to tell a full funnel brand story from base awareness through consideration and purchase. And it's just really exciting to see her both build that team and the early work that's coming from that momentum.

[Operator Instructions] There are no further questions. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Afternoon to day 2 of the Flagship TMT Conference. My name is Erik Woodring. I lead the hardware coverage here at Morgan Stanley. I'm delighted to be joined by Sonos today, Permanent CEO, Tom Conrad, a shift from a year ago.

I mean the Board likes to remind me. Nothing is permanent, but more permanent than the interim.

And then obviously, CFO, Saori Casey. So both of you, thank you very much for joining us today.

Thanks for having us.

Before we start, very quickly, let me point you to the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

So Tom and Saori, welcome back to the conference. Congrats again, Tom, on being named permanent or -- you know what I mean? A lot has changed in the last 12 months strategically for Sonos. And kind of 2 quarters ago, you kind of first laid out your vision or at least your updated vision for Sonos. Can you maybe elaborate on what you're trying to change, maybe what you're trying to keep the same and what this means for the future of Sonos?

Yes. I mean, a year ago, just about, I was -- I've been the interim CEO for a month or 2. Board was in the middle of their search process for the permanent CEO. And I was really focused then on 2 things of the company. The first was restoring the performance and reliability of the underlying software platform for Sonos to return us to customer advocacy and just materially improve the delivering on all of our core promises in our customers' homes. And then Saori and I were deeply engaged in kind of transforming the efficiency of the company. And over the course of the 6 months before I arrived and the 6 months or so after I arrived, Saori was really instrumental in helping us optimize $100 million of run rate out of the operation.

And I'm delighted to say, too, on top of all of that, I think that we're operating with greater urgency with greater impact and delivering on a more sophisticated ambition and road map than we were in the previous chapter. So like it was a kind of win-win. But I was named CEO just about August 1, so 7 months ago. And the nature of an interim assignment, I think particularly in the case of Sonos is that it's fairly tactical. You're focused on the sort of a relatively short-term horizon. And so when I was named in August, it was really my first opportunity to begin to bend the arc of the company towards the strategy for our next decade.

And I think if you look at the 20-year history of the company, a decade under the stewardship of our founder, John MacFarlane, and then almost another decade under Patrick Spence. You might describe the chapters as the first chapter was relentlessly focused on delivering the whole home music vision that John and his co-founding team started from. And so the product was really Sonos. They had a couple of amplifiers and a speaker, but it was really -- what they sold was the experience of Sonos whole home music. And they really anticipated this shift from physical media to media that was streamed from the cloud in a really prescient way.

The second decade of the company's life under Patrick, I think the emphasis was around excellence in operations and delivery as a hardware company. So the company went from shipping a product every couple of years to shipping really, really reliably 2 great new expressions of Sonos' hardware every single year under Patrick's stewardship. And I think if I were to critique the last 5 or 6 years of the company before I arrived, it would simply be that, that laser focus on turning the company into a hardware execution team had the unintended consequence of letting the company take its eye off of the system-level promise of Sonos.

And by the time I arrived, not only were we in crisis on the performance and reliability of the software stack, we had also sort of forgotten what it meant to sell Sonos as the product as opposed to a pair of headphones or a mid-tier soundbar or an entry-level portable speaker. And so, my strategy is really to combine the best of both of those capabilities in one, a return to Sonos as a system for seamless entertainment in the home, powered by best-in-the-world hardware execution engine. And so the -- that has a lot of implications for the company in terms of how we operate every day. And maybe in some ways, the single biggest thing is it puts equal strategic weight on ensuring that the whole is greater than the sum of its parts than rather all of the emphasis being on these individual launch points for individual SKUs.

And I think that -- it might be a nuance, but I think it's important because if we do go back to kind of the original promise of Sonos, it was create this system, you can have this amazing zoning, amazing sound quality. You're refocusing on the system. So can you maybe elaborate a bit on the distinction that you're trying to make there between a collection of endpoints and reinvigorating the kind of system that the story started with?

Yes. I mean, there's so many different dimensions to this. One dimension is just the core experience of the platform needs to be seamless and effortless and work every time and anticipate your needs using the power of AI. And we're doing all kinds of work to get to a place where you just have that sense of like you sort of imagine what you want on Sonos and it just happens. But to talk a little bit about the difference between launching something like a pair of headphones in a SKU-centric model versus a system-centric model. When we launched Sonos Ace, without question, the best headphone you can buy in terms of noise cancellation, comfort, battery life, Bluetooth compatibility, it's an exceptional product relative to any other pair of headphones out there. Ironically, though, it's missed opportunity is that at launch, it was not deeply integrated into the Sonos environment.

So I think what any Sonos customer would reasonably expect from a pair of headphones we sell them is that they would be able to move through their home and have music effortlessly flow from the speakers and sound bars that they have to the headphones and Ace didn't deliver on any of that at launch. Today, it delivers an exceptional experience with respect to integration with our soundbar experience, but still underdelivers with respect to the rest of the Sonos ecosystem. Another example might be our Era 300 Atmos speaker, best speaker in the world for listening to surround music and home theater. However, when you place it in a room with the rest of the Sonos home theater experience, it does not have the sophistication today to understand its orientation. And as a result, it kind of -- it diminishes to a lowest common denominator about what its role is going to be in the home theater setup. This is a failure of system.

We have all of the mechanisms and expertise to place the speaker in the room. But in the NPI and this new product introduction sort of model, the SKU-centric model, all of the emphasis went into that object as a single item, not as how it expressed itself in the home there. So we're -- I could go on and on and on. But there are countless examples, both high level and low level of how an investment in system up levels the entire product offering.

And while you're not explicitly saying this, what I hear or what I hear when you say that is there's investments in software that we're making also to enable this system. Can you maybe talk about, again, going beyond the improvement to the app, but the improvement that you're focusing on with software to make that system what you want the system to be?

Yes. I mean, I think the interesting thing about software investment is that so much of what we do accrues to the totality of the experience and not to the individual SKU. And so during this sort of SKU-centric chapter of the company, it was it was culturally hard for the organization to prioritize the software investments that differentiated the whole versus the software investments that enabled the individual object, if that makes sense. So we are very focused today on a world-class software organization that is delivering the Sonos platform, which sits atop all of the particular hardware instances and delivers all of these delightful completely differentiated one-of-a-kind experiences.

Okay. And in the past, we've kind of talked about this model of like there's a number of households, there's product per household. I forget if it was last quarter or the quarter before, but you kind of outlined 5 different growth levers that you have for the company. At a high level, can you maybe just refocus on exactly what you're trying to do with each of those 5 growth levers?

Yes. So it was on the last call, we talked about the answer to the question of how do you return Sonos to growth. I think there's 5 dimensions of opportunity. We will continue to launch incredible new hardware projects. And so this year, in the back half of the year, we have a whole bunch of things ready to go. Very, very excited to start telling the world about our hardware portfolio after almost a year of pause while we were working on restoring performance reliability, delight to the core software experience. And new hardware launches for us will always be a vector for growth, differentiation, repurchase from existing customers, expansion within the home.

Second dimension is return to customer advocacy. I think if you look back at the history of Sonos and try to ask the question of like where did growth and familiarity come from, it was truly from word of mouth, like people actually advocating for a product like true NPS activating in the world. People love Sonos, it's a social experience. You go to someone's home, Sonos is playing, you'll talk about the experience, and we were a huge benefit of -- beneficiary of customer advocacy throughout our history. And because of the underinvestment in the software platform and because of the acute performance issues that were introduced in the sort of infamous software release from early 2024, we saw all of that, frankly, reverse. And we've made so much progress that all of the metrics, whether it's NPS or customer sentiment on social, customer satisfaction through our CX channels, all those trends are reversed and are in a place I'm really proud of, and we're seeing that begin to become a tailwind again. I think in part because we were such a beneficiary of efficient word-of-mouth, the product sold itself, I don't know that the company has ever had an exceptionally developed full stack marketing muscle.

And so the third growth lever for us is a renewed investment in best-in-world marketing capability. Colleen DeCourcy just joined us as our Chief Marketing Officer. She was Co-President and Chief Creative Officer at Wieden+Kennedy for a decade, truly one of the greatest marketers in the whole world. And she's been with us here for about 6 weeks now, and her thinking is already starting to take hold in the organization. We're really, really excited about what it means to become a brand that can tell the whole story of the company and our ethos and then the product and really up-level our presence and culture and familiarity.

As a result, the fourth lever is a geographic expansion. We talked about this on calls for my whole tenure at the company. We have -- we've identified a handful of key markets that are showing early promising signs of potential for us and are leaning into the investments that are required to facilitate that early growth. We're seeing results. They're early, but exactly what we would hope to see the investments yielding at this point.

And then the fifth dimension is there are really interesting consumer behavior adjacencies that are happening around audio, I mean, particularly around conversational AI. We're in 17 million homes. We have tens of millions of microphones that we can connect to services that are integrated with the conversational AI personalities that customers are increasingly making a part of their daily life. That unlocks not just behavior in our traditional scenarios around entertainment and mood, but really just around the whole broad sphere of modern computing, where you can do almost anything with your voice that you just used to be reliant on your phone or a personal computer for. So I'm really, really confident that we can return the company to growth. We will in the second half of the year. We've talked openly about that. And I think the combination of these 5 levers working together are a really powerful tool for us to get back to impressive growth.

Awesome. And underlying that return to growth, talk to us just about the broader kind of market landscape. And I'm not -- we'll get into one specific memory question. But just when we return to growth, is that Sonos taking share and kind of Sonos-specific actions that are bearing fruit? Is that the market maybe getting a little bit better and you seeing a tailwind from your own actions? Just where does demand stand today? Where do you see it going at a broad level?

Yes. I mean I think there's a couple of ways to interrogate this. On top of the 5 sort of dimensions of growth that I talked about, we're spending a lot of time talking about what we call the lifetime value model inside the company, which is like how do we acquire new households? How do we get those households started with a collection of products that demonstrate the system value of Sonos? How do we get them to extend the portfolio of products throughout their home over time. And then ultimately, how do we get them to repurchase products and refresh them at what would have been otherwise the normal end of their life cycle. And like none of what I just described is going to be anything new to anybody who's ever led Sonos. But like so many things in business, it really is about execution. And I think if there's a change here, it's really fundamentally that we're driving the business on these dimensions every day in every department.

And so the sales organization is with our retail partners, armed with data that speaks to how many households are your stores helping us acquire, what's the initial receipt size in terms of the number of objects that they're taking home with them, those particular customers, what's their repurchase behavior? How does it relate to what your competitors are doing and how can we get you to the place that you're best-in-class? One example of how you take the LTV model and drive it to action from individual contributors in the company. So there's just a lot of execution, execution, execution across all the lanes I described through that lens.

I think one of the unintended consequences of being so focused on individual SKUs is that we let the conversation about the company be about the sum of those categories. And so growth even became measured by well, what's happening in the categories, what's happening to headphones, what's happening to portables, what's happening to soundbars. And while in the details, of course, there's a tailwind or a headwind associated with those things. I think it's much more interesting to examine what is the opportunity for the whole Sonos system? Who are the true competitors in that landscape? And how do you stack up against those competitors? So like it's not that interesting to me that we compete with Samsung for soundbars or JBL for portable speakers or Sony and Bose for headphones. It's much more interesting about like who is trying to control the sound operating system in the home.

And I think, candidly, those competitors look much more like Amazon and Apple and Google. And I'll tell you, I think the -- the first point of differentiation for Sonos in that market is that we're the only company in the mix that understands that to do this well, you have to deliver every dimension of sound. So -- and Alexa has like 4 SKUs. Apple has 2 SKUs. I think Google has 2 or 3. But the customer they want -- they want a large sound bar for the 100-inch television in the living room, and they want a subwoofer to go with it, and they want some spatial rears as well. They want a small sound bar for the television in the bedroom so they can understand the dialogue when their kids are asleep. They want a pair of headphones that pairs with the TV that's in the basement so when their kids are playing video games, the whole house doesn't have to hear the audio.

They want a small speaker for the bathroom and in the dining room and kitchen, they want in ceiling speakers powered by commercial class amplifier that's hidden in the closet somewhere. And no one has that ambition but us, and it literally is what the customer require. And like don't even get me started on like the services and transports they want. They want Bluetooth. They want Spotify Connect. They want Airplay. They want all of the music service providers. They want increasingly all of the AI agents. And again, just -- I don't think anyone that Sonos has signed up for that task.

Cool. That's awesome. Let's -- maybe Saori, I want to bring you into this conversation. Something that you guys have done that's been incredibly impressive has been use pricing as a lever to offset tariffs. Two-part question. One is, post Supreme Court ruling, just how does the landscape on tariffs change? I realize it could change again, but just as we're sitting here at this moment in time...

I mean we've been up here for 15 minutes.

We're going to stand with 15 minutes left of the conversation. But then second to that is, obviously, there's kind of this new emerging price concern or cost concern, which is memory. And I would love if you could just kind of address the memory concern in terms of access to supply, sensitivity, what you're doing to offset that as well.

Yes. Thanks for the -- you always get -- I always get the hard question. Yes. So as far as tariffs, we had set out to -- since last April as the tariff rates were going all over the place, we were doing the work even previous to that on our pricing strategy, which was specifically -- and the changes that we had made beginning of April. Coincidentally, the timing when the tariffs started to take hold was around the understanding what Tom talked about, the lifetime value of customer, how do we gain -- monetize that over time. And we -- based on the data that we've looked at from the past on what are the customer behaviors and what products are the entry into Sonos system and how they grow over time with Sonos system that Era 100 was a key product in our portfolio that plays that role exactly. And the pricing level that we had previously made was not doing that job that it was intended to do. So we took that opportunity to reduce the price.

As tariff happened, we used that same playbook in looking at what each one of our products, what do they do in our portfolio, and we did a very surgical approach to this pricing for mitigating tariffs to maximize our gross profit dollars, if you will, and minimize the elasticity of reduced revenue coming from that price increase in order to mitigate tariffs. And so fast forward the clock, we had implemented those pricing mitigation actions tail end of September. And so we had the full impact of that, that we could see resulting in Q1 and mostly in aggregate, it came as expected. So we're extremely not happy about tariffs, but happy that our pricing strategy worked according to our data suggests and how we executed.

And so, that's something we'll continue to look at, along with our pricing strategy and specifically about where are we today? Most of our products are produced in Vietnam and Malaysia. So our rates are somewhere in the 19%, 20% tariff rates. Most recent, it went to 10%, possibly 15%. But if it lands at 10%, it will be half of what we incurred in Q1. So that certainly is a benefit to us. And at some point, maybe like the last round of tariffs that we may be in a position to be able to file for refunds, but we're not counting on that at the moment since the landscape believing what the rate is, is still up in the air. As far as -- yes.

Before we move to memory, just I want to just pop up for a minute to one level higher and say that inside the company, we have a phenomenal global operations team, who owns supply chain, logistics, manufacture and cost down, optimizing the cost structure of the portfolio after it leaves, initial engineering and production and lives in the market over its lifetime. And this is the team that we primarily tasked with tackling the tariff mitigations. This is the same team that would have managed rare earth metal cost fluctuations that goes -- went into our transducers 6, 7 years ago. The same team that helped figure out how to get products in and out of overloaded ports during the COVID period.

It's just to say that one of the complicated aspects of the life we've chosen is things like an emergent memory crisis. And so I'll let you take over from here, but the same team that did such exceptional work mitigating the tariff exposure began the work in anticipation of what now the whole world is talking about on the memory front way back last summer.

So you can tell a little bit about where we are and all that.

No, definitely. Yes. So the same team -- just to add to that point on the operations team, they also had done a really nice job moving the supply chain over from China to Vietnam, Malaysia because had the tariff hit. While we were still in China, we were much more bigger world of -- on that. So really a shout out on that one. Even though Vietnam and Malaysia ended up taking these tariff rates, it could have been much worse. So we were extremely -- I don't want to say lucky because it was planned to move it off from the risk of that supply chain, but it worked out really well for us.

On the memory front, we're certainly not immune to this, and we're keeping an eye open on a daily, hourly basis on this front. Certainly, it's dynamic. So again, we're not immune to it. But unlike other consumer electronics that may be more memory-heavy like the smartphones and the PCs, our configuration is such that the most memory consumption is at 2 gig level down to 512 megs -- on the average about 1 gig of memory on our configuration. So the percentage of the BOM for our products is less so than others. Again, the price increases is so massive that certainly will affect us and it is affecting us. And what we're seeing so far is in our Q2 guidance that we have guided our gross margin from 44% to 46%, but we're certainly not going to predict where the market is going.

And so the same operations team is working very actively on securing more suppliers to make sure that we reduce the need to buy the memory at the spot price, which is the worst of the price we can get. So that is an active ongoing, very urgently done activity. The operations team has been working on. And so not to say we're done and check on that given the market dynamics, but we're working on that as well as looking at the configuration of our products. Do they need the amount of memory configuration in the products, both existing and new. In particular, on the new one, we have control over them. And Tom has also talked in the past about how we control the stack of our products, including how the software is inducing the need for the memory. And given we write our own OS for this, that we have some control over what kind of configuration of the memory is necessary in our products, both existing and new. So lots of mitigation actions that we're taking at this point as we observe where the market is going, and we're doing everything we can.

And maybe just last question attached to that. Just pricing as a mitigation tool. I imagine it's kind of last -- like the last tool that you probably want to use, but I guess it's still a tool that you'd be willing to use if you have to.

That's right.

Okay. All right. Cool. Something I want to dig into, and it's funny. I get excited by this, even though some might not, is the cost side because you guys have done an incredible job of becoming much more efficient in your business. Saori, this was kind of a huge initiative that you drove. Can you just -- you've been able to cut OpEx on an annual basis by about $70 million. That's like 10% of OpEx. That's a big cut. Just help us understand what's left to do beyond what you've already done? And given a lot of the initiatives that Tom has talked about, where you might have to lean in, like where do we think OpEx goes from here?

Yes. No, thanks for that. In fact, I think we could probably count to more $100 million plus on a run rate basis. And so your number is accurate about how we ended the year. And so we're -- the work is definitely not done. I mean, in fact, as an enterprise, you want to look at how you operate on an ongoing basis and drive efficiency, especially in the world of AI, and we have a large software team. And so Tom definitely is championing the opportunity on how we seize those opportunities for the company to become not only more efficient, but to be able to even do more with the software capabilities of the company, and I'll have Tom add to any point on this. But -- so I think any of those operational efficiency we gain, we get to do more and/or we get to reinvest back into other initiatives in the company. There's certainly no shortage of those. We're in the mode of what Tom -- as Tom came in, and we really honed in on doing fewer things better, but that means we may be leaving some opportunities on the table that we couldn't invest with the envelope that we're looking at, but that allows us the opportunity to invest more into the future growth. So we're very excited about that.

Cool. Capital allocation, capital structure, very clean capital structure, obviously. Any changes to capital allocation as you think about it, as you look forward, again, thinking new Sonos strategy, anything that changes as it relates to maybe your strategy?

Yes. Yes. No, part of our capital allocation framework is to leave enough behind for opportunities where in the past, we've done more tuck-in type of M&A. So -- and also any operational risks that might emerge. For example, last year, when there was a period in which it would have behooved us to pull in our production for the finished goods earlier before the new tariff rate was kicking in. So times like that, we're having enough capital to have flexibility operationally to do that was tremendously helpful. And so we tend to -- we'll continue to have some level of buffer to be able to take opportunities, both operational or strategic and then pour the rest into the buyback opportunities.

Our capital expenditures are fairly minimal. It is down on a year-over-year basis, partly due to the biggest capital expenses were coming from the investments in the point-of-sale displays in our retail sites, but we're also taking approach in rationalizing that and also understanding the useful life of those CapEx. So now we're expensing those. So you'll see our capital expenses going down on a year basis. It is still flowing through the P&L, but to make sure that we're looking at that more diligently. So -- yes, so we'll continue to keep that capital allocation framework going and buyback as much as we can.

Last 2 questions for me. Tom and Saori, please feel free to jump in on this. When we're kind of hypothetically sitting here in 3 years and having this kind of same discussion, you've executed through this transition and this new strategy that you're looking to perfect. What is structurally different about the business, whether that is revenue mix, revenue growth, software as a driver, margin profile, competitive position? I'm just trying to think big picture, like what is your intention if we can look 3 years for Sonos to look different than it does today, macro and market notwithstanding?

I mean I'll start by saying I just -- I think that the product offering will be perceived as a segment of one. I think we're the only people in the world that do what we do and the product will better articulate that. Our marketing will better articulate that. The awareness of our brand will be dramatically expanded in the world. We'll have a dramatically expanded presence in countries that where today we are just getting started. I'm confident that we're on a path as a company and as a world to conversational AI in every environment, and Sonos will be at the center of that. And we'll be back in a place where we're just one of the defining beloved brands in consumer electronics.

Cool.

Yes. No, nothing more to add there.

Perfect. Before we end, maybe just very quickly touching -- I'm going to go back -- just touching on the installer channel. It's something I feel like is maybe underappreciated, 25% of revenue, though, so it should not be underappreciated. Just how is it a differentiator, you're leaning into it? Just maybe expand on that a little bit.

Yes. So it's about 22% of our business today. We have -- they sell everything from the sound bars and subwoofers that our consumer customers buy, but also we've made a portfolio of unique products available to them. Era 100 Pro is custom designed for that channel. And Sonos Amp Multi, which we just announced at ISE in February, will come to market this fall. It's a multi-channel amplifier, first of its kind in the market, really redefines the way that an installer puts a high-end audio system into a custom home. And I see just so much upside in that channel. And it's -- again, it's an example of how where every dimension is sound and we cover these use cases from $139 entry-level portable speaker all the way up to, I think, the number of speakers that of installation of Sonos Amp Multi fully configured can support 768 speakers in [indiscernible]. So we really run the gamut from people starting off in the dorm room to somebody in their -- their mansion in Malibu.

Cool. Maybe just last word before we let you go.

I'm just excited about what the future holds. I mean, like the -- to begin to bend the arc of the company to the new strategy that we're pursuing is a tremendous honor for me and feel really lucky to be partnered with people like Saori on the journey.

Awesome. Saori, Tom, thank you very much.

Thank you.

Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sonos First Quarter Fiscal 2026 Conference Call. [Operator Instructions]

And I would now like to turn the conference over to James Baglanis Head of Corporate Finance. You may begin.

Good afternoon, and welcome to Sonos First Quarter Fiscal 2026 Earnings Conference Call. I am James Baglanis and with me today are Sonos CEO, Tom Conrad; CFO, Cary Casey; and Chief Legal and Business Development Officer, Eddie Lazarus.

Before I hand it over to Tom, I would like to remind everyone that today's discussion will include forward-looking statements regarding future events and our future financial performance. These statements reflect our views as of today only and should not be considered as representing our views of any subsequent date. These statements are also subject to material risks and uncertainties that could cause actual results to differ materially from expectations reflected in the forward-looking statements. A discussion of these risk factors is fully detailed under the caption Risk Factors in our filings with the SEC.

During this call, we will also refer to certain non-GAAP financial measures. For information regarding our non-GAAP financials and a reconciliation of GAAP to non-GAAP measures. Please refer to today's press release regarding our first quarter fiscal 2026 results posted to the Investor Relations portion of our website, investors.sonos.com. After the call concludes, we will upload our revised supplemental earnings presentation, including our guidance as well as a conference call transcript to the IR website.

I will now turn the call over to Tom.

Good afternoon, everyone, and thank you for joining us. Coming into fiscal 2026, my focus was straightforward. Build on the stability we reestablished in 2025 and start bending the trajectory of the business towards durable growth and profitability. I'm proud to say the fiscal year is off to a good start. We delivered Q1 revenue of $546 million with gross profit dollars growing 5% year-over-year. Adjusted EBITDA grew 45% year-over-year to $132 million.

Revenue came in above the midpoint of our guidance range. And on the bottom line, we generated as much adjusted EBITDA in this 1 quarter as we did in all of fiscal 2025. That performance reflects the fiscal discipline and structural changes we put in place over the past 18 months, which have driven more than $100 million in run rate savings while still preserving room to invest in innovation. We're encouraged by the strength of Q1, but our ambition is far greater than 1 quarter. The work ahead is about building durable, repeatable growth over time. Returning our company to growth is not about a single quarter, a single launch or a single trend. It's about sustained coordinated action anchored in the power of the Sonos system.

At the center of our strategy is a simple idea, Sonos is not a collection of products. It's a system that gets more valuable as you add to it, use it across more rooms and rely on it over time. That system behavior is what drives repeat purchase longer customer lifetimes, and ultimately, more durable growth. So we're now executing across 5 growth dimensions, each designed to strengthen that system advantage. The first growth dimension is product innovation. We are focused on creating new products that are genuinely differentiated, deeply tied to the home and designed to strengthen Sonos as a system rather than stand-alone devices. Our hardware and software road maps are tightly connected and the goal is simple, products that work better together, unlock more use cases and make the system more powerful with every addition.

The second growth dimension is a return to customer advocacy, built on excellence in performance, reliability, ease of use and customer service alongside a broader and more coherent software platform. When the system works well, customers trust it, expand it and recommend it. System reliability is not just a quality metric for us. It's a growth driver.

The third growth dimension is more intentional and effective marketing. With the arrival of our new CMO, [ Colin DeCourcy ], we are rebuilding our go-to-market engine around a full funnel brand architecture that connects long-term brand storytelling with a clear, consistent system narrative. Sonus is the easiest way to build a sound system for the home and it gets better as you add to it. That clarity is sharpening both how people enter the system and how quickly they expand once they're in.

The fourth growth dimension is accelerating our success in geo expansion. We see a meaningful opportunity to expand our global footprint through the right mix of products, pricing, partnerships and local relevance while making it simple for new households around the world to start with Sonos and then grow their system over time.

The fifth growth dimension is tapping demand from emerging external trends. Our system position allows us to explore new inaction models, including conversational AI in the home and new modes of content interaction in ways that feel additive rather than uninvited or far afield. These are experiences that only make sense because a trusted system is already in place.

Let me highlight a few areas where you can already see progress against these growth dimensions. Starting with product innovation. Our hardware and software road maps are now tightly aligned around the opportunities ahead. After an intentional pause in new hardware launches last year, while we focused on strengthening our software foundation, we are back to introducing new products with a lot planned for the rest of 2026. Last week, we unveiled Sonos Amp multi. It offers our installer partners a powerful new building block combining flexible, best-in-class multi-zone amplification with simpler installation, configuration and tuning. AMP MULTI makes complex systems easier to design, deploy and manage while advancing both sound quality and reliability. More importantly, Amp Multi is a clear expression of our system strategy. This is what we mean by building products that don't just perform on their own but make the whole home experience easier and better. as homes become more connected, Sonos can become the audio platform that underpins whole home experiences and Amp Multi allows Sonos to be built directly into the architecture of sophisticated homes. This product is designed specifically for our installer and integrator partners. It helps them take on larger projects, work more efficiently and grow their businesses with Sonos as a trusted system at the center.

The relationships we built with professional installers over the past 2 decades are a real differentiator for Sonos. When our installers do well, so does well, and we see meaningful opportunities to continue investing in products, software and support that help them scale with confidence. Turning to customer advocacy. We continue to make meaningful progress this quarter on system performance and reliability across 10 software upgrades. These improvements are showing up in higher customer satisfaction across all channels and measures and better system performance accelerates everything we do. On marketing and demand creation, we are getting more precise about how people enter the Sonos system and how quickly they expand once they're in.

One early decision we made was to reduce the price of Era 100, recognizing its role as a critical gateway into Sonos, that move is paying off. Q1 marked the third consecutive quarter of accelerating new customer growth among households that start with Era100, up more than 40% year-over-year. Era 100 is doing exactly what we designed it to do, introduce new households to the Sonos system in a way that naturally leads to expansion across rooms and use cases. Expanding lifetime value within our installed base is another important leverage. Customers who start with Era 100 have historically shown strong repurchase behavior, and that pattern continued this quarter with newer cohorts. We also saw growth in multiproduct customer starts, which matters because customers who experience Sonus as a system from the outset build deeper, longer-lasting relationships with us.

As a reminder, increasing lifetime value represents a significant opportunity within our existing installed base alone. If we move from today's average of almost 4.5 devices per multiproduct household to 6 devices per household, that represents roughly $5 billion in incremental revenue, converting single-product households to current multiproduct levels adds another $7 billion. That upside is driven by system behavior. When customers use Sonos across more rooms and moments, they buy more over time and stay with us longer.

Looking beyond our installed base, we currently hold about 6% of the $24 billion global premium audio market. There is substantial room to grow that chair, particularly outside our core markets, while continuing to expand the sound system category that Sonos created. A great example of this is we saw another quarter of dollar share gains in premium home data in both the U.S. and EMEA. Finally, our platform decisions us well to tap into new external demand trends. With more than 53 million connected devices and over 17 million homes, Sonos is a trusted platform where service is old and new can coexist, giving households real choice anchored in a system they value.

That puts us in a strong position to explore new interaction models, including conversational AI in the home in ways that complement the experiences people already love. As I've said before, our vision for Sonos is to be every dimension of sound for the home, music, movies, stories, rooms, formats, conversations and control all connected through a single cohesive and radically easy system. That idea of systemness is the lens through which we make decisions and the foundation of our long-term advantage.

What ultimately drives all of this is the world we're building for our customers, a home that comes alive with sound, experiences that move naturally between moments, moods and spaces where products and software work together and the whole becomes meaningfully greater than the sum of its parts. You'll see more of that vision come to life with the products we have planned for the second half of fiscal 2026. After a year inside the company, seeing the people, the craft and the ambition of close, my conviction has only grown that Sonos has everything it needs to return to durable growth.

Q1 mattered not just because of the results, but because it showed that the underlying business is getting healthier. We proved we can manage through tariffs with discipline deliver profitability above expectations and do it while continuing to strengthen the system. The second quarter will be quieter as it is often for us, but the first half as a whole reflects a business that is stabilizing and beginning to turn. For the past year, as we focused on software performance and reliability, we've been operating without new products to bring new customers into the system or Spark repurchase. That changes in the back half of the year.

We are entering that period with the system performing better and more reliably than it has in many years with customer sentiment improving and with a slate of new products designed to strengthen the system rather than just add devices. We're already gearing up for that moment now. With a solid Q1 behind us, modest growth expected at the midpoint of our Q2 guidance and a clear line of sight to acceleration in the second half we are executing against a clear plan to return Sonos to growth in fiscal 2026.

With that, I'll turn things over to Saori.

Thank you, Tom. Hi, everyone. In Q1, we generated revenue of $546 million, above the midpoint of our guidance range, marking our sixth quarter of execution, delivering on our commitments. On a year-over-year basis, revenue was down 1% compared to guidance of down 7% to up 2%, while GAAP gross profit dollars grew 5%. The Revenue in the Americas grew 1% year-over-year, while EMEA revenue declined by 4% and APAC by 5%.

We also saw continued momentum in our growth markets which once again outpaced the rest of our markets. On a product basis, plug-ins delivered double-digit growth, driven by strong performance from Era 100. As Tom mentioned, Q1 was the third quarter of acceleration in new customer growth since we reduced the price of Era 100 as part of our pricing strategy we've spoken about over the past few quarters. Q1 GAAP gross margin was 46.5%, and non-GAAP gross margin was 47.5%, both modestly above the high end of our guidance range. The nearly 300 basis points year-over-year improvement in gross margin resulted in gross profit dollars growing 5% year-over-year, driven by lower cost, FX and some favorability in onetime items, partially offset by unfavorable product mix.

Consistent with expectations we outlined last quarter, tariff expense was an approximately 300 basis point headwind to gross margin which we were able to offset with mitigation actions led by the pricing adjustments we made towards the end of September. Q1 GAAP operating expenses of $153 million decreased by 21% year-over-year, while non-GAAP operating expenses of $137 million were down 19% year-over-year. As a reminder, Q1 operating expenses were unseasonably low due to timing of product launches and associated spend. Stock-based compensation was $15.2 million, down 40% year-over-year from $25.3 million last year. Adjusted EBITDA was $132 million at the high end of our guidance range, representing growth of 45% from $91 million last year.

As Tom mentioned, we generated as much adjusted EBITDA in Q1 as we did in all of fiscal 2025 and reflecting how far we have come in our transformation journey. Adjusted EBITDA margin grew 760 basis points to 24.2%, our highest in the last 4 years. Non-GAAP earnings per share grew 37% to $0.93, up from $0.68 last year. As I've said in the past, returning capital to shareholders is a key pillar of our capital allocation framework. Accordingly, we've spent $25 million on share repurchases in Q1 at an average price of $16.79, reducing our share count by 1.2%. We have $105 million remaining in our current share repurchase authorization.

Our balance sheet remains strong as our net cash balance ended the quarter at $363 million which includes $51 million of marketable securities as we hold some excess cash in short-duration treasury bills. Our period end inventory balance of $125 million declined $16 million or 11% year-over-year and 27% compared to last quarter.

Our inventory consists of $111 million of finished goods and all $15 million of components. Q1 free cash flow was $157 million, up from $143 million last year, primarily due to higher earnings. CapEx was $6 million, down from $13 million last year. Turning to our guidance. The Q2 outlook we're providing today reflects the trends we have observed quarter-to-date and are our best estimates. We expect Q2 revenue to be in the range of $250 million to $280 million, down 4% to up 8% year-over-year and up 2% at the midpoint. Please note that this does not include any revenue contribution from AMP MULTI, which is not generally available until the second half of fiscal 2026.

Taken together with our Q1 results, we expect revenue in the first half of fiscal 2026 to be $796 million to $826 million, flat year-over-year at the midpoint. This represents a continued improvement from a 6% decline in the first half of fiscal 2025 and a 3% decline in the second half of fiscal 2025. Looking ahead, with AMP MULTI and other yet to be announced products slated to launch in the second half of fiscal 2026, we expect a further improvement in our year-over-year revenue trends returning us to growth. We expect Q2 GAAP gross margin to be in the range of 44% to 46%, with non-GAAP gross margin approximately 220 bps higher than GAAP. This represents a year-over-year increase of 130 basis points at the midpoint of GAAP and 10 basis points for non-GAAP, implying gross profit dollar growth 5% and 2%, respectively. Please note, our gross margin guidance range embeds higher memory costs in Q2. While we are not immune to memory cost inflation, our products have modest memory requirements between 512 megabytes to 2 gigabytes with many products containing 1 gigabyte or less.

For the first half of fiscal 2026, the midpoint of guidance implies that our -- gross profit dollars grew 5% year-over-year on a GAAP basis and 4% on a non-GAAP basis. We expect Q2 GAAP operating expenses to be in the range of $150 million to $160 million down 11% at midpoint from last year as we comp over last year's reduction in force and its associated restructuring charges. We expect non-GAAP operating expenses to be lower than GAAP by approximately $16 million. As previously mentioned, our operating expense seasonality this year reflects the timing of our product introductions in the second half of fiscal 2026, driving a modest sequential increase in operating expenses from Q1 to Q2.

For the first half of fiscal 2026, the midpoint of our guidance implies GAAP operating expenses of $308 million, down 16% year-over-year, a decline of $60 million. On a non-GAAP basis, implied operating expenses of $276 million will be down 9% year-over-year, a decline of $28 million. Bringing it all together, we expect Q2 adjusted EBITDA to be in the range of negative $18 million to positive $10 million, implying first half adjusted EBITDA of $128 million up 42% year-over-year, an improvement of $38 million from $90 million last year. Our guidance for the first half shows that we're building momentum through fiscal 2026 and while maintaining the financial discipline groundwork we laid in fiscal 2025. At the midpoint, we expect revenue to be flat, gross profit dollars to be up mid-single digits non-GAAP operating expenses to be down 9% and adjusted EBITDA growing by 42%, implying 470 basis points of margin expansion.

This significant improvement in our financial performance is the direct result of the progress we made in becoming leaner execution-focused organization. With AMP MULTI announced and additional new products planned for the second half of fiscal 2026, we're increasingly confident in the trajectory of the business and our plan to return to growth in fiscal 2026. Our focus remains on returning to durable top line growth, balancing continued profitability improvements and disciplined reinvestments of our efficiency gains toward product innovation, customer advocacy, intentional and effective marketing, geo expansion and tapping into the demand from external trends like proliferation of conversational AI in the home.

With only a small fraction of the global market captured so far, we see a vast opportunity in front of us to expand our household base and improve customer lifetime value. After the call, we will update our earnings slides to reflect our Q2 guidance.

With that, I'd like to turn the call over for questions.

[Operator Instructions]

And our first question comes from the line of Steven Frankel with Rosenblatt.

I'd like to start by following up on the comments you made about memory cost, that's obviously an area where there's a lot of investor concern. I've gotten lots of questions. So could you address both what you're doing to deal with the rising cost and its impact on gross margins? And also, are there any availability issues? Do you feel like the ramp of new products in the back half could be somewhat gated by the ability to procure sufficient amounts of Ram?

Thanks, Stephen. Thanks for joining us. Of course, memory pricing is a headwind across the entire hardware industry. But -- we have a really great team on this. And as last year's tariff mitigation demonstrated they have a real track record of managing through these kinds of cost inflation, supply chain volatility.

So as you can imagine, this team has been taking action on this for some time. I think what's most important is ensuring that we have adequate supply to reduce reliance on spot market pricing. So the team has secured and certified additional memory suppliers. I think it's also important to highlight, as a already shared in her prepared remarks, our products have modest memory requirements between 512 megabytes and 2 gigabytes of RAM with many of our products containing a gig or less. And just as important as that is that relative to PCs and phones, customers don't buy Sonos products based on a memory configuration. They buy them for the experiences they deliver.

So we are also actively driving cost efficiencies across our product architecture. Just to touch on the impact of the supply situation on the products we have planned for the second half of the year I think we have the dimensions I just outlined well in control and we should be good on that front.

Great. And then in terms of the team, you've made some changes when will we see the beginnings of Colin's impact on marketing programs? And do you feel like the team is complete today? Or should we anticipate a few more changes?

I'll take the second part first. I'm super excited about the team that I have around the table with me today, just incredible folks to the last. And not least of all, Collin, who's been with us for just 3 weeks but is already making great progress in how our marketing organization shows up. With respect to when you'll start to see the impact of her contribution. He already has worked well underway, aligning our creative and messaging and channel execution around a more consistent system, narrative and she's really moving as quickly as she can to implement all of those changes, and I think everyone should expect to see that activity to ramp relatively quickly.

Broadly, our goal is to move away from the sort of episodic spikes that historically have been left tied to individual product launches and shift to a more sustained marketing presence that reinforces how the Sonos system works and why it matters. So you should see gradual compounding improvement starting right away rather than anticipate some single large brand advertising launch super excited about the work that she's driving here. It's been a great first month for...

Great. So I won't be looking for a Super Bowl commercial, so that's good news. And you keep talking about a system which we understand and you dropped some hints about AI and where Sonos of those fits. Could you flesh that vision out anymore. You talked a little bit about it last quarter, but are you willing to share any more details on kind of how you see those 2 worlds intersecting and making life better for Sonos users?

Yes. So let's start with just systemness. We really believe that the power of Sonos is that the whole is truly greater than the sum of its part. And we talk about that, we're talking about is things like effortless multi-device room behavior, radically easy control, a unified design system across hardware and software context, aware experiences that understand who you are and what you want before you even ask kind of synchronized intelligence, things like Trueplay and dynamic allocation of experiences across surround sound, all under the banner of Sonos operating system that our customers understand.

So we're at the opening stages of executing across all of those dimensions and I think it's going to be the real differentiator as we've described for the product family going forward. As it relates to AI, I think there's maybe 3 different dimensions to think about, 2 in the product and 1 inside of our operations. The first is, given the scale and breadth of our installed base and the role that we play in our customers live, I think we're in a really strong position to explore new interaction and models with them, including conversational AI in the homes in ways they complement the experiences that people already love with Sonos and feel invited rather than tacked on.

Second of all, I think artificial intelligence techniques are incredibly powerful, not just for conversations, but for anticipatory design, system features that just anticipate your needs and serve you exactly the right content and exactly the right setting with the smallest amount of input from you as a user. So in that world, AI can just make the Sonos system smarter, more personal and even easier to use long before you even get to conversation. So the third category, of course, is how we're leveraging AI inside of Sonos. And I think it's indisputable that since the last time we were together on an earnings call that we've been through another rapid acceleration of the evolution of these AI productivity tools, particularly in the domain of software development. And we are at the leading edge of integrating those tools into our workflows, and I'm really excited about the productivity gains that we're going to build from these tools and how much it's going to accelerate our ability to innovate on the system experiences for our customers.

And our next question comes from the line of Erik Woodring with Morgan Stanley.

Awesome guys. I have 2 as well. Tom, I wanted to maybe zoom out and just get your take on kind of the broader health of the premium home theater market amid this kind of K-shaped economy. I understand that you guys are taking share, which is what we want to see. But are there any green shoots that you can point to or the opposite, I guess, for that matter?

And geographically, anything that stood out to, obviously, Americas up versus international down. Just would love to get your take a little more broadly. And then I have a quick follow-up, please .

Sure. Yes. Speaking specifically to home theater, as we described in our prepared remarks, we do continue to grow our share in the Americas and EMEA, we have, without question, the best home theater products in the category by a wide margin, and we love what we're doing there. you mentioned the kind of K-shaped macro demand that the category is experiencing. And I think that's consistent with our read of the market which is to say, growing demand for premium experiences pulled down by diminishing demand for entry-level experiences.

Fortunately, our product portfolio is well positioned to take advantage of those trends. But we continue to watch it closely. And I think the zooming in on home theater and it's quarter-to-quarter strengths and weaknesses is just a good opportunity to say again that we really don't think of the business going forward as category based, and we think there's tremendous opportunity for us to differentiate Sonos itself with an expression in home theater, but extending from that 1 venue in the home into all of the other spaces where people need music and sound experiences and my ambition for the company is to disentangle us from all of these individual categories as we go forward. It's probably also a good time just to say something about the incredible power of the installer channel for us.

As we talked about, we've released our second product in the last year. Custom designed and conceived for that channel. It's a business we've been building for a couple of decades now. We have incredible relationships there. It's 22% of our business and growing, and we're -- we're excited to continue to partner with that channel and take advantage of the opportunity to sort of build Sonos into the very architecture of the home.

Awesome. Okay. That was exactly what I was looking for and more. And then maybe Saori, just shifting over to you. really nice gross margin performance this quarter. That's probably an understatement and really nice guide. Just given the fact that you're close to all-time high gross margins, but you're doing this with tariff headwinds. I know you talked about the size of the tariff headwinds, I believe. But can you just maybe help us bridge the gap from last December quarter is 44.7% non-GAAP gross margin to the mid-47% number that you just put up in the December quarter. What were the tailwinds most important to leasing part?

And then what were the headwinds kind of most impactful to least impactful? Just added color on that would be really helpful.

Yes. Thank you, Eric. Yes, we were very pleased with our gross margin percent results both relative to our guidance and our expectation as well as on a year-over-year basis. Some have commonalities there. Certainly, our continued effort on reducing cost. It resonates on both compares that we're looking at. And then we have -- we also have an element of FX that is a tailwind for us right now. Now that's to say -- and then we -- as we talked about at the last earnings call, we did increase price in the middle of the second half of September as part of our price tariff mitigation efforts -- and so those are things that are tailwinds.

On the other hand, some of it is to combat the headwinds that we have, namely the biggest impact this quarter being tariffs. And then we have product mix, certainly in the holiday quarter, as Tom also talked about in the prepared remarks, -- we had a really strong performance on Era 100, which is a lower price point product that tend to have lower gross margin as well. So that's a product mix headwind that we have. And last year, at this time, we had launched Arc Ultra with associated channel fill. So we do have that compare as part of our headwind on a year-over-year basis. And as we mentioned on the call, the price mitigation or tariff mitigation actions that we've taken certainly are working for us. And it's in line with what we had expected.

We had come into this quarter thinking tariff will impact us on about 300 basis points. And our mitigation actions, the biggest 1 being pricing had helped us mitigate nearly all of that. And then on to a slighter extent, we do have the memory headwind, but that was more negligible in this quarter. But as we said on the call, Q2 guidance range of 44% to 46% gap in 47% non-GAAP certainly does embed that impact. And as Tom also talked about earlier during the Q&A.

We are doing everything we can to mitigate the need to buy at the spot price in the market and securing our suppliers as much as we can. So those are some of the puts and takes we're looking at right now. Certainly, the favorable impact is outpacing our unfavorable headwind that we have.

Our next question comes from the line of Brent Thill with Jefferies. .

This is John Ben on behalf of Brent. Just 2 questions, 1 maybe for Tom. You've been CEO for a little over a year now, I guess. And so I wanted to see maybe if you could kind of review what are some of the biggest changes that were made in your first year? And what are some of the biggest initiatives you're looking for ahead for the next year? And then -- maybe we'll try again maybe on the geographic color in terms of Americas being up versus international done?

I don't know if there's anything additional you can share there for a salary.

Thanks for remember that I just went through my 1-year anniversary with the company, 6 months as interim and then 6 months as the named CEO. It's been an incredible year for me as a person and for the company overall. As you know, we spent a good chunk of last year, making material progress around improving the core experience of Sonos's performance, reliability, just customer service experiences honestly, just doing the hard work of winning back our customers as our advocates. And I'm so proud of the progress that the team has made. And so grateful for the patients that our customers showed us through what had been a very difficult chapter.

And as I described at the top of the call, I'm just incredibly excited to have that chapter behind us and now be focused on the work of the next act for Sonos return to growth and structural profitability, you've heard me kind of say on the call that our belief is that returning to durable growth is really about executing across multiple dimensions at once, product innovation, customer advocacy, marketing excellence, geographic expansion, capturing our place and emerging external trends? And what's exciting about these is that they're really compounding dimensions.

For example, as our marketing muscle develops, it impacts positively our success in geographic expansion as customer advocacy improves it makes it easy for -- easier for us to launch new products into the market successfully. So really focused on executing against those 5 dimensions while returning to new product introductions in the second half of the year, that will be an accelerant for us. And Yes. Just we've turned our view towards the horizon, and it's exciting to be in a strategic moment for the company.

Just to add a few more points specifically on the geographic color here. We did show a slight growth for Americas. Certainly, that's our biggest market that we serve notwithstanding our efforts to focus, as Tom just mentioned, on the geographic expansion and the growth markets that we are expanding into is continuing to outpace the growth of the rest of the markets that we're serving. So that continues to be our highlight here.

Overall from a product basis by geography across all of the geographic areas -- we are seeing -- we saw strength in the plug-ins revenue or the AR 100 led growth that we're seeing ever since we have adjusted the price as part of our pricing strategy to drive more gross profit dollars and that is exactly what's serving for us at the moment. We did gain share in both Americas and EMEA for home theater. And Lastly, our continued expansion into some of the products that we had the last NPI that we had launched in Q1 last year and, those are doing well, but we do have a difficult comp this year because there were channel fills that took place a year ago. So that's part of a headwind that's partially offsetting some of the strength that we're seeing.

[Operator Instructions] And with no additional questions at this time. This will conclude our question-and-answer session as well as today's call. We thank you for your participation, and you may now disconnect.

Thank you for standing by. My name is Kayla, and I will be your conference operator today. At this time, I'd like to welcome everyone to the 60-minute Sonos Fourth Quarter and Fiscal 2025 Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to James Baglanis, Head of Corporate Finance. You may begin.

Good morning, and welcome to Sonos' Fourth Quarter and Fiscal 2025 Earnings Conference Call. I am James Baglanis, and with me today are Sonos CEO, Tom Conrad; CFO, Saori Casey; and Chief Legal and Business Development Officer, Eddie Lazarus.

Before I hand it over to Tom, I would like to remind everyone that today's discussion will include forward-looking statements regarding future events and our future financial performance. These statements reflect our views as of today only and should not be considered as representing our views of any subsequent date. These statements are also subject to material risks and uncertainties that could cause actual results to differ materially from the expectations reflected in the forward-looking statements. A discussion of these risk factors is fully detailed under the caption Risk Factors in our filings with the SEC.

During this call, we will also refer to certain non-GAAP financial measures. For information regarding our non-GAAP financials and a reconciliation of GAAP to non-GAAP measures, please refer to today's press release regarding our fourth quarter and fiscal 2025 results posted to the Investor Relations portion of our website. As a reminder, the press release, supplemental earnings presentation, including our guidance and conference call transcript will be available on our Investor Relations website, investors.sonos.com.

I will now turn the call over to Tom.

Good morning, everyone, and thank you for joining us today. Q4 brings a strong close to fiscal 2025 for Sonos. In Q4, we grew revenues 13% year-over-year and posted strong positive adjusted EBITDA. 2025 was, without question, a transitional year for the company, but I'm proud of all we accomplished. We restored the quality of our software and now can speak confidently about the new capabilities we're delivering across the Sonos experience. We drove efficiencies and financial discipline into every aspect of our operations. We reorganized the way that we work in product and engineering. And as a result, today, we are executing with greater urgency, focus and effectiveness.

Over the course of the last 3 quarters, you've also seen the work we're doing to rebuild our senior leadership team. And today, I'm thrilled to announce another important step on this front. In January, Colleen DeCourcy will join Sonos as our new Chief Marketing Officer. Colleen is one of the most celebrated creative leaders of her generation, bringing extraordinary taste, cultural insight and a proven ability to connect creativity with business growth. She joined us following a successful tenure at Snap, where she served as Head of Marketing and Chief Creative Officer and before that, as Co-President and Chief Creative Officer at Wieden+Kennedy.

All of this progress creates a strong foundation of excellence from which to return to growth and expand profitability, but there is more to do. The company doesn't just need more discipline, better execution and a revitalized team. We need a new strategy. Over the last several years, Sonos has produced excellent products. But in thinking about what hardware to make, what software experiences to deliver and how to bring those offerings effectively to market, we've lost focus on what makes us different and better. And what's more, we've lacked an organizing theory of the case. I'm changing that, and I'd like to tell you a bit more about the details today. While others sell fragments, a sound bar for the TV, headphones for the commute, Bluetooth for the beach, Sonos is every dimension and sound for the home, music, movies, stories, rooms, formats, conversations and control, all connected into a single, cohesive and radically easy system.

The pursuit of this system is now our organizing lens for decisions and the foundation of our durable advantage. The Sonos system is independent by design and is the premier platform to connect first- and third-party experiences with incredible audio. It's why today, Spotify, Apple Music, YouTube Music, Amazon Music and over 100 others all thrive on Sonos. It's also why we bring together Bluetooth, AirPlay, Spotify Connect and analog sources alongside formats like Dolby Atmos and Lossless Audio to uniquely deliver every dimension of sound. With our installed base of over 53 million smart Internet-connected devices and more than 17 million homes and growing every day, the Sonos platform is the trusted place where services old and new work side by side, giving households freedom of choice anchored in a system that they love.

Casting into the future, we see a world where live natural conversations with AI personalities are as commonplace as smartphones are today. And we believe Sonos' expertise in Internet-connected, voice-enabled personal hardware products for the home can position us as the center of these interactions. Starting now, our future hardware and software road maps are single-mindedly directed at leveraging our position in the home to deliver bold experiences, both traditional and entirely new that will make Sonos even more relevant and beloved in the eyes of our customers. From a financial perspective, this strategy is underpinned by a compounding model built on generating new households and increasing lifetime value. Generating new households means bringing more homes into the Sonos ecosystem, growing our installed base through great gateway products, sharper marketing that tells our story more forcefully and continued international expansion.

Increasing lifetime value is about deepening our relationship within every household. That starts with engagement, delivering products that become an essential part of everyday life and then encouraging people to grow their Sonos systems over time, whether that's adding more rooms, headphones or building out a comprehensive home theater experience. At the end of fiscal 2025, the average Sonos household grew their system to 3.13 products and multiproduct households increased to an average of 4.49, still well below what we believe a fully realized Sonos home can become. But lifetime value isn't just about how many products someone owns, it's about the horizon over which they're investing in their Sonos systems. We want households to keep upgrading, expanding and discovering new ways to enjoy Sonos for decades. We'll do that by keeping system fresh through reliable software, excellent service and product updates that inspire people to reinvest in Sonos.

As one example of the power of this compounding model, we see a $5 billion revenue opportunity in driving devices per multiproduct household higher to 6 per home and another $7 billion in converting single product households to current multiproduct levels. Taken together, this alone is a $12 billion opportunity just within our existing base. Our opportunity is to write the next great chapter for Sonos. For the last many years, we were just selling speakers and experimenting with new categories. Today, we're building a cohesive system that compounds in value, stronger as it grows, smarter as it evolves and more essential over time. We hold just 6% of the $24 billion global premium audio market. There is no reason we cannot garner a much larger share of this market while we simultaneously grow the sound system category that we invented.

While our strategy will take time to fully manifest in our hardware portfolio, including the delivery of entirely new products for use cases and spaces in the home that we do not occupy today, we enter fiscal 2026 with an incredible portfolio of products that we are bringing into tight alignment with the strategy through software updates. We'll further strengthen the family with new hardware products launching in the second half of the year, and we'll continue to sharpen our brand storytelling, expand internationally, drive excellence in our installer channel and partner selectively to reach new audiences.

As we turn this page, we also continue to execute effectively and with discipline. We've reduced our operating expense run rate by more than $100 million while selectively investing in the opportunities where our conviction is highest. We've kept margins healthy even while navigating tariffs. We've grown adjusted EBITDA despite top line challenges. We've invested in innovation to unlock future growth while returning capital to shareholders through buybacks. And we've deepened our relationships with our channel and installer partners. What drives all of this is the world we're building for our customers, a home that comes alive with sound and experiences that move seamlessly between moments, moods and spaces where every product, software component and interaction works together and the whole becomes much greater than the sum of its parts.

I've said before that Sonos is one of the few companies in the world with the ingredients to build beloved consumer products at the very highest level. As we enter fiscal 2026, I've never been more certain of our ability to do this. I see it in the passion of our team in the way customers respond when we make their systems better and in the discipline with which we've reshaped the company around our core strengths. Great things lie ahead.

Now let me turn things over to Saori.

Thank you, Tom. Hi, everyone. We closed out fiscal 2025 on a high note as we delivered strong Q4 financial results. Revenue of $288 million was near the high end of our guidance range, driven by solid demand. On a year-over-year basis, revenue grew 13% versus our guidance of up 2% to 14%. We saw strong double-digit growth in EMEA and our growth markets more than doubled in Q4. Our growth markets contributed more than 1/4 of our overall Q4 growth rate. On a product basis, we also achieved strong double-digit growth in home theater and plug-ins. Q4 GAAP gross margin was 43.7% and non-GAAP gross margin was 45.1%, both at the high end of our guidance range. Compared to last year's Q4, gross margin improved nearly 340 basis points on a GAAP basis and more than 400 basis points on a non-GAAP basis, driven by comp over onetime hits in prior year from inventory reserves to app recovery-related costs, in addition to cost savings and leverage, partly offset by impact of tariffs this year.

Q4 GAAP operating expenses were $160 million, down 7% year-over-year. Non-GAAP operating expenses of $135 million were down 6% year-over-year. On a normalized basis, primarily for variable compensation, non-GAAP operating expenses declined by 19% due to cost optimization efforts we had set out in August of last year. Adjusted EBITDA was positive $6 million, which was $4 million above the midpoint of our guidance range. This is a $29 million improvement year-over-year due to higher revenue, better gross margin and lower operating expenses. Our balance sheet remains strong as our net cash balance ended the quarter at $228 million, which includes $53 million of marketable securities as we hold some excess cash in short duration treasury bills. We also have an undrawn revolving credit facilities at our disposal, which we just extended for another 5 years. Q4 cash flow was negative $2 million, up from negative $54 million last year, primarily due to higher cash earnings. CapEx was $5 million, down from $16 million last year.

Our period-end inventory balance declined 26% year-over-year to $171 million as we comp over last year's inventory build ahead of launch of Arc Ultra and Sub 4 and work down of component inventory. Our inventory consists of $153 million of finished goods and $18 million of components. As I said in the past, returning capital to shareholders remain a key pillar of our capital allocation framework. Accordingly, we spent $20 million of share repurchases in Q4 at an average price of $13.39, reducing our share count by 1.3%. For fiscal 2025, as a whole, we spent $81 million to repurchase 5.7 million shares at an average price of $14.23. We have $130 million remaining on our current share repurchase authorization. In addition to keeping our share count in check through regular share repurchases, we're managing dilution through the actions that we took to reorganize and reduce layers of senior management, which has resulted in our annualized stock-based compensation expense decreasing from $101 million in Q1 to $68 million in Q4.

For the full year, our revenue was $1.44 billion. While our overall revenue declined 5% year-over-year, we saw strong double-digit growth in our growth markets, which contributed almost 1 percentage point of growth rate to total revenue. We also saw growth in home theater, which helped us gain further share in U.S. premium home theater for the third year in a row, where we retained our #1 position. We also improved our share in EMEA, where we hold the #2 position in premium home theater. In fiscal 2025, we grew our installed base 5% to 17.1 million households. Devices per average household grew to 3.13, up 2% from the prior year. We also saw growth in devices per multiproduct household, which improved to 4.49, up 2% year-over-year. Consistent with past years, our existing households accounted for 45% of product registrations.

GAAP gross margin came in at 43.7%. Non-GAAP gross margin of 45.2% was down just 60 basis points year-over-year despite price decrease on key products and tariffs due to cost savings efforts and product mix. Our GAAP and non-GAAP operating expenses declined by 8% and 10%, respectively, on a reported basis and 16% and 17% on a normalized basis. Adjusted EBITDA increased 23% year-over-year to $132 million, driving 210 basis points of margin improvement to 9.2%. This is a direct result of our transformation efforts over the past 5 quarters, which have resulted in Sonos becoming a leaner and more focused organization with sharper financial discipline. As we continue our transformation journey and gain operating leverage through top line growth, we expect to increase our margin over time. Non-GAAP earnings per share grew 31% to $0.64 due to lower operating expenses and reduced diluted share count.

Lastly, free cash flow was $108 million, down from $135 million in fiscal 2024 due to $35 million of nonrecurring items this year. Excluding these nonrecurring items, which included $24 million of cash restructuring payments and $11 million of tax payments for intercompany transfer of IP, fiscal 2025 cash flow would have been $144 million, up [ $9 billion ] or 7% year-over-year.

Turning to our guidance. The Q1 outlook we're providing today reflects the trends that we have observed quarter-to-date as well as our expectation of demand in the holidays. We expect Q1 revenue to be in the range of $510 million to $560 million, down minus 7% to up 2% year-over-year. Growth in underlying demand should be slightly positive at the midpoint, better than the year-over-year change in revenue as we comp over launch and channel fill of Arc Ultra and Sub 4 in Q1 of last year.

Looking beyond Q1, we expect improving year-over-year comparison with new product launches concentrated in the second half of fiscal 2026. We expect Q1 GAAP gross margin to be in the range of 44% to 46% with non-GAAP gross margin approximately 110 basis points higher than GAAP. This represents a year-over-year increase of more than 100 basis points increase at the midpoint for both figures. This guidance comprehends the impact of tariffs and pricing changes. Please note that we expect our Q1 gross margin to benefit from the following 2 factors: one, leverage from holiday sales volume; and two, a lower effective tariff rates, thanks to our seasonal inventory build in Q4. We expect our effective tariff rate to step up and stabilize in Q2, representing a further 100 basis point headwind versus Q1.

We expect Q1 GAAP operating expenses to be in the range of $152 million to $162 million, down 19% at midpoint from last year, with non-GAAP operating expenses to be lower than GAAP by approximately $16 million. Please note that our operating expenses will vary quarter-by-quarter in part due to timing of product launches and associated expenses. Bringing it all together, we expect Q1 adjusted EBITDA to be in the range of $94 million to $137 million, representing year-over-year growth of 27% and a margin of approximately 22% at midpoint of roughly 500 basis points of margin expansion. When I first outlined our transformation journey in August of 2024, we committed to improving efficiency, regaining profitability and investing in long-term growth. In fiscal 2025, we executed on this pivotal work, growing adjusted EBITDA by 23% and non-GAAP EPS by 31%. Our results reflect the progress we've made in becoming a leaner and more nimble organization.

Furthermore, we evolved our pricing strategy with an eye towards growing households and increasing lifetime value. I want to thank the entire Sonos team for their commitment and resilience in executing and adapting to many changes this past year as we navigate this journey. It is important to note that this critical improvement in our profitability did not come at the expense of future growth. Though we have significantly reduced our operating expenses, we have grown our investments in enhancing our core software experience, expanding our global footprint and investing in our people. We'll remain disciplined as we focus on returning to durable top line growth, balancing continued profitability improvements with reinvesting efficiency gains and advancing our pricing framework in alignment with our corporate strategy to strengthen our platform, attract new households and increasing customer lifetime value.

With only a small fraction of the global market captured so far, our view is that there is a vast opportunity in front of us. After the call, we will upload our new investor presentation to our IR website, which has been updated to reflect the strategy Tom described earlier in the call as well as our fiscal 2025 results in our Q1 guidance.

With that, I'd like to turn the call over for questions.

[Operator Instructions] Our first question comes from the line of Steven Frankel with Rosenblatt.

Tom, you've laid out an interesting new description of your strategy. And I'd like to drill down just a little bit. To date, you relied on third parties like Alexa for bringing intelligence to the product. Are you talking about maybe trying to bring some of those capabilities in-house when you're describing AI interactions with your products?

I think you'll see us be a platform for both third-party AI experiences as well as our own first-party experiences in the same way that in the past, we hosted Alexa and Google Assistant and our own Sonos Voice experience. So I think there's tons of opportunity in both of those lanes for us.

Okay. And then in terms of the holiday season, could you give us some insights into your promotional posture for holidays and what you expect your competitors to be doing at this point?

Steven, it's Saori. Thanks for the question about the holidays. Clearly, the holiday -- the peak of the holidays are still ahead of us and with some of the tariff-related activities, mitigation factors that we've put in place. We're monitoring that. And so far, those are coming in as expected. And so that's comprehended in our guidance that we provided on the call. We're continuing to see demand track so far. And so as we go into the holidays, we have some of the usual activities that we're contemplating, but combined with some of the, again, the tariff mitigation activities that we have contemplated. And so we are monitoring how those play out.

And should we expect you to -- given your desire to improve the products per household and get upgrades going, extend a lot more efforts going forward in the installed base through e-mail marketing and promotions to the installed base as opposed to advertising, marketing promotions in the channel in general?

Yes. One of the things I mentioned on the call or referenced was the pricing strategy that we're now starting to take, which is in alignment with the strategy that Tom described on the call, which is exactly to improve the household acquisitions, but the quality household that will provide the repurchase cycle. And so the pricing strategy that we have started to reorient ourselves in the spring when we, in particular, reduced the pricing of the Era 100 speaks to product selectively that we're taking on the pricing where we'll bring in the quality household with the tendency for the future repurchases and maximizing our lifetime value from our customers.

I was just going to add. I think it's important to remember that there's really kind of these 2 levers in the model. The first is growing households. And so part of growing households is going to be about doing a better job of telling a sort of full funnel marketing message from driving awareness for the Sonos system to gaining consideration among consumers and then driving to purchase for new households. We'll do that through better gateway products, more compelling experiences, better differentiation and stronger marketing.

And then as you point out, there's real opportunity for us around better engaging with our existing customer base to drive expanded lifetime value, and we'll do that through both the current product portfolio, marketed better and through entirely new products that will drive new use cases in the home for our customers.

Your next question comes from the line of Erik Woodring with Morgan Stanley.

Tom, I think it's really exciting that you can lay out this new strategy for Sonos. And I just wanted to ask you about it. Again, I guess I'm putting words in your mouth here, but it sounds a little bit like you're attempting to become more of a broad-based smart home platform because obviously, to date, the differentiating Sonos value prop has been the system of connected sound devices that you've provided. So when you say a cohesive system that compounds in value, can you maybe just give us a little bit more granular understanding of exactly what that means and maybe some of the adjacencies that you're referencing? And then I have a quick follow-up, please.

Sure. I'd like to start by kind of contrasting what we're doing under this new strategy to where we've most recently been. I think for the last -- maybe as many as 7 or 8 years, the company has been very focused on building great individual products, best-in-class sound bar, a best-in-class pair of noise canceling headphones, a best-in-class portable speaker. And the execution of the company from product to marketing has really reflected that category approach. And what we're doing with this strategy is going to seem at some level familiar because in a way, it is a return to form. Sonos started as a connected system, not just this kind of loose collection of products. And so thematically, we are going back to our roots. But I think what has changed in the last decade is the scale of what system can mean today.

Early Sonos really just connected a few rooms together to play music in sync and frankly, at the founding, not even from the Internet, from a collection of MP3 files that sat on a hard drive in your home. Fast forward 20 years, the canvas is just far, far bigger. We have hundreds of services, formats, traditional voice control and this whole new explosion of AI personalities that I think can all come together in the home. And so yes, we are evaluating the opportunity for ambience in the home and entertainment in the home outside of just audio and video and film. But I think better to think about like the entirety of the canvas of what the consumer experience can be in the home and what the Sonos platform with our 17 million homes, more than 53 million Internet-connected voice-enabled devices already in the field, what that platform can become in this sort of new era.

Okay. I got you. That makes sense. I'm looking forward to hearing more about that as we keep going. And then say, can you maybe help us better understand how you guys are absorbing what I think are relatively outsized tariff costs? Like if I just say 60% of your business is in the U.S. and the average tariff rate in the areas where you produce your devices is, call it, roughly 20%. That's a pretty sizable tariff headwind. We're talking like several tens of millions of tariff -- incremental tariff costs. So at the same time, I think you're trying to open your funnel a bit with certain pricing actions. So just can you help bring it all together and help us understand, obviously, a very strong 1Q profitability guide even before we get to the OpEx dynamics. How are you absorbing all of these costs?

Erik, I'm going to jump in here because I'm just so proud of how the company has reacted to this unexpected headwind that sort of fell in our lap in April. And it's taken a real kind of not just cross-functional effort inside of Sonos, but in our entire ecosystem of working with our partners to get to the mediation of these tariffs that we've been described in Saori's remarks. But just to put some numbers to it, so you can think about it. In Q1, we're looking at about 300 basis points of margin impact due to tariffs at their sort of current blended rate. Virtually all of that impact has been mitigated by our actions. And so what are those actions? Those are pricing, those are how we're using promotion. That's all the work we've done with our channel partners to share the burden of these costs. So great progress for Q1.

Now looking forward to Q2, the blended rate -- the tariff rate stays the same, call it, about 20% on the products that we make in Malaysia and Vietnam that come to the United States. But as the sort of blended effective rate fully sort of lands in Q2, we see that margin impact in total, it was 300 basis points become about 400 basis points. And so our mitigations sort of are already fully landed. They're going to land at about that 300 basis points place. So in the end, fully realized, we'll see about 100 basis points of margin impact across the whole business due to the tariffs. Again, this is just one of those things, those curve balls that you tackle in a company like ours. I'm just really, really proud of all of the hard work that the team has done.

And frankly, also how well it's all landing in the market because, of course, going into it, there's a lot of modeling that you do, a bunch of analysis, particularly around the elastic response to things like price changes. And I think the team has done just a great job of predicting where the market would be. And so far, we're seeing that our estimates are really playing out in the real world.

Well, okay. That is awesome. That is very impressive. And maybe just the last one, and this is kind of open-ended for you, Tom, is you characterized 2025 as a transitional year. How are you characterizing 2026 today? And then that's it for me.

Thanks. I mean I really feel like it's a whole new chapter. I mean last time we were together on the call, I had just been named the CEO and described that when you're an interim CEO, particularly under the circumstances that I came into Sonos, you're focused kind of on the immediate horizon. And we did a lot of work to sort of transition the company in 2025. And I really feel like we're turning the page on a new chapter for the company now. We're looking much farther out on the horizon. I'm so excited about Colleen joining us to breathe new creative energy and execution into our marketing organization. We've delivered a strategy that brings the entire company together around the Sonos system. And we're beginning to execute on the road map that will land first a whole set of new experiences powered by software and to land new messaging in our marketing that will tell the world about what we intend to be and the services that we can provide in their homes.

And then in time, of course, you'll see new hardware expression of the strategy come to market as well. And it's just -- I mean, honestly, it's just sort of a delight to get to be focused on the next chapter of Sonos and to feel like the transition is now behind us.

And your next question comes from the line of Brent Thill with Jefferies.

Just to follow up on the heels of that question. Just when you think about being in the C5 months, I know you've had a playbook, but as you kind of put it, you're now the full-time coach. So on this new playbook that you're unveiling, maybe if you can give us just a hint of how you think about the biggest areas of improvement and the action plans to achieve those improvement plans.

I'm an engineer and builder by background. And when you face a new sort of opportunity, product definition, the first work that you do is sort of decompose it into its constituent parts and begin to execute. And so much of what we've been doing is that work of decomposition of building the right team, improving our operating discipline, setting out a clear strategy to the team, setting a financial model that we know will drive growth and then doing the work of defining what are the product executions that deliver on the strategy. And so for my part, I'm just -- I'm excited about doing that decomposition and getting to work on the constituent pieces with the entirety of the company behind me. And I'm just -- again, I'll just reiterate my enthusiasm for where I think we can be in time.

I guess the question we get is how much change needs to happen in your mind for you to get and achieve this? Is this a fine-tune? Or is this more of a drastic overhaul?

I think we're really building from a place of strength here. We have tens of millions of Internet connected voice-enabled devices of the highest quality in 17 million homes. We've got a software platform that was designed from the ground up for both third and first-party services to express themselves. We have best-in-class sound and microphone technology. We now have an incredible world-class marketing leader at the helm of our marketing organization. And I think at the end of the day, in most cases, setting the strategy is a tiny fraction of the work, and it's just about execution after that. And so now we're really just in execute mode.

Just to add to that, Brent, this is Saori. Some of the other activities that we've already have started reoriented, as Tom called 2025, the transition year that we're looking forward to advancing is things like the pricing strategy that we started to implement in the middle of FY '25 that we're starting to see some of the fruit of that. And with Tom's new strategy that's being more clearly articulated, we're really aligning that sort of the portfolio view of how we look at our products and how we price and how we expect the margin of those products with a lifetime value of the customer in mind as well.

And so that's another aspect of how we're approaching the company differently than in the past that we can speak to. And this is all in addition to some of the OpEx cost optimizations that we've been doing, the transformation work that we've been doing that has taken, as Tom said, over $100 million, and there are more efficiencies that we're working on that we're really actively looking to where to best invest for the future growth of the company. So there's many aspects of how we operate are different than in the past that I wanted to just add to the point that Tom is making.

Yes, that's great. Just while we have you, just when you mentioned EMEA was strong in the quarter, maybe just double-click into what you're seeing in EMEA.

Yes. No, aside from some of our execution, we are seeing also some parts of EMEA market also doing as well. But certainly, we've seen EMEA respond well to some of these pricing changes that we've made in the middle of the year and products like Arc Ultra, that's more of a global speak, has done really well at the home theater space. They've continued to gain share in the space. And so both between the innovation of the products that we have and the pricing strategy and how we're approaching some of these markets that have been relatively depressed in the last couple of years. EMEA had been hit even harder than U.S. in the past years. And so we're starting -- we're really excited to see some of the recoveries that we're seeing in those markets.

In addition, as we also mentioned, we're looking at some of the geographic expansions as well. And so there are some markets that we focused on that are also starting to fruit.

[Operator Instructions] And there are no further questions at this time. Tom Conrad, I'll turn the call back over to you.

Thank you. Just as we close, I want to come back just for a second to the heart of our strategy. At the center of everything we're working on is the Sonos system. One connected experience that gets better with every product, update and household we add and most importantly, where the whole is far greater than the sum of its parts. It's a pretty simple idea with enormous potential, and I'm so excited about where we're headed. I also want to thank the team for the hard work that brought us here, our partners for the incredible teamwork they've shown us this year and our investors for believing in me and where the company is headed. So thank you so much for joining us today, and we look forward to talking to you next quarter.

This concludes today's conference call. You may now disconnect.

Good afternoon. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sonos Third Quarter Fiscal 2025 Conference Call. Today's conference is being recorded. [Operator Instructions]

At this time, I would like to turn the conference over to James Baglanis, Head of Corporate Finance.

Good afternoon, and welcome to Sonos Third Quarter Fiscal 2025 Earnings Conference Call. I am James Baglanis, and with me today are Sonos CEO, Tom Conrad; CFO, Saori Casey; and Chief Legal and Business Development Officer, Eddie Lazarus. Before I hand it over to Tom, I would like to remind everyone that today's discussion will include forward-looking statements regarding future events and our future financial performance. These statements reflect our views as of today only and should not be considered as representing our views of any subsequent date.

These statements are also subject to material risks and uncertainties that could cause actual results to differ materially from expectations reflected in the forward-looking statements. A discussion of these risk factors is fully detailed under the caption Risk Factors in our filings with the SEC.

During this call, we will also refer to certain non-GAAP financial measures. For information regarding our non-GAAP financials and a reconciliation of GAAP to non-GAAP measures, please refer to today's press release regarding our third quarter results posted to the Investor Relations portion of our website. As a reminder, the press release, supplemental earnings presentation, including our guidance and conference call transcript will be available on our Investor Relations website, investors.sonos.com. I will now turn the call over to Tom.

Thank you, James, and thanks to all of you for joining us. I'm speaking to you today, not just as the new CEO of Sonos, but as someone who deeply believes in what this company can be. I've devoted my career to building consumer products that people love, and I took this role because I believe Sonos is one of the few companies with the ingredients to do that at the highest level.

There's a reason I have a Sonos as a tattoo in my forearm. I love this company, its mission and the possibilities ahead. Over the past 6 months, I've had the chance to work closely with every part of this business, and I've seen just how much our people care about the quality of our products, our customers' experience, the craft of what we build and the operational rigor we bring to the task every day.

Working with this incredible team has only deepened my conviction that Sonos can be among the most consequential hardware platform companies in the world. That's why I'm so honored the Board has asked me to lead Sonos into its next chapter and why I'm so optimistic about what comes next. My appointment is not just a leadership transition. It's a turning point for the company, a return to our founding principles of obsessive craftsmanship, customer-first design and category-defining innovation.

We have a lot of work ahead of us to translate our convictions into a return to growth with better profitability, and we're approaching the challenge with urgency. Now let me tell you why I'm so excited about the future.

First, the Sonos we're building today is not just a product company. We're a platform company, a platform where our expanding portfolio of hardware products compound in value, thanks to powerful software upgrades that deliver unique experiences for the home and beyond. This ecosystem connects not just our products, but also our partners, developers and consumers. Every new product, every software feature and every integration ensures that over time, Sonos becomes more powerful, more interconnected and more irreplaceable in our customers' homes.

Second, Sonos has an extraordinary brand. We're the clear leader in wireless home audio, and we have earned that position by delivering consistently great sound, thoughtful industrial design and a system that works across every room in the home. That's not marketing spend. It's why we're the #1 home theater brand in the U.S. and why our installer and channel partnerships remain so strong.

Third, we're making significant operational progress. Earlier this year, we reorganized to improve our product cadence while reducing our annual operating expenses by more than $100 million. This is catalyzed focus on the things that matter, the core experience, profitable growth and the kinds of innovations only Sonos can deliver. For example, this quarter, we delivered new AI-powered voice enhancement features on Arc Ultra and state-of-the-art adapted noise cancellation for Sonos Ace. We're keeping this momentum as we build a strong road map that stretches through fiscal 2026 and beyond.

Finally, there are many opportunities ahead for growth. Despite our market leadership, we've only captured a small fraction of the global market. We have room to add new households and grow our installed base in both our existing and key growth markets. What's more, our installed base is a powerful asset itself and roughly 40% to 45% of annual product registrations come from existing households.

And we're leaning into this by delivering experiences that get better as your system expands, which is just to say, we know we have more to do. We'll make Sonos more relevant to people's daily lives by expanding the experiences we deliver and making them even easier to enjoy. We'll be more assertive in the products we bring to market and more expressive in how we tell the Sonos story.

We can reconnect more deeply with artists, with culture and with the spirit of invention that has always been part of this company. This is the Sonos I'm building. It will take some time to bring this reinvention to market, but we will move with conviction and clarity of purpose and the payoff will be clear over the medium to long term.

Now let me share a few comments about our performance in Q3 and the business environment in which we're operating. We had a solid quarter with revenue and adjusted EBITDA at or above the top of our guidance. Our results reflect a tight focus on execution, which yielded dollar share gains in home theater in the U.S. and on efficiency, which drove continued year-over-year declines in our operating expenses.

With respect to our operations, like many companies, the most significant near-term challenge has been the uncertain tariff environment. As a reminder, short of a few accessories and our passive speaker partnership with Sonance, we do all of our U.S.-bound manufacturing in Vietnam and Malaysia. We talked last quarter about the contingency planning we underwent to minimize the effects of tariffs on our business while also doing what we can to limit the downstream impact to our customers.

With last week's news, the tariff rates we were subject to going forward appeared to be 20% for Vietnam and 19% for Malaysia. We continue to work closely with our contract manufacturers and our channel partners to share tariff costs, though it has become clear that we'll need to raise prices on certain products later this year.

As these pricing changes land, we'll monitor consumer behavior closely as well as competitive trends across our categories, and we'll make adjustments in collaboration with our channel partners when and if necessary to ensure we're exploring every opportunity to optimize our respective top and bottom lines.

In conclusion, Sonos has the right to lead. We have the brand, the platform, the team and the permission to define what great means for audio and entertainment in the home, on the go and into the future. We lost the momentum in 2024. We're starting to get it back, and we're going to accelerate our pace from here. Now let me turn things over to Saori.

Thank you, Tom. Hi, everyone. We're pleased to deliver Q3 financial results that exceeded our expectations. Revenue of $345 million was above the high end of our guidance range, driven by better-than-expected portables and component products. Q3 revenue declined 13% year-over-year versus our guidance of down 22% to 14%. Excluding the impact of the launch of Ace last year, when we recognize the revenue of the channel fill, our revenue was down mid-single digits in Q3, slightly better than the first half of the year and better than the overall category trends.

This was driven by Arc and Arc Ultra, which grew on a year-over-year basis. Gross margin was 43.4%, near the midpoint of our guidance range. Non-GAAP gross margin was 44.7%. We incurred $2.1 million of tariff expenses in Q3, which was a 60 basis point impact to our reported gross margin. This is consistent with our guidance for under $3 million in Q3.

Q3 GAAP operating expenses were $153 million, down 15% year-over-year. Non-GAAP operating expenses of $131 million were down 15% year-over-year and came in about $9 million below the low end of our guidance. On a normalized basis, primarily for variable compensation, non-GAAP operating expenses declined by 23% as we saw a full quarter benefit of savings from the reduction in force announced last quarter as well as from many other cost optimization efforts we had set out last summer.

As for the year-over-year trends of each non-GAAP operating expense category, research and development expense decreased by 17% due to cost optimization efforts from the prior quarter. G&A expenses decreased by 16%, driven by headcount and various cost optimization efforts initiated last year. Sales and marketing expenses decreased by 13%, driven by higher marketing investments last year from the launch of Ace. Adjusted EBITDA was positive at $36 million, at the high end of our guidance range of $12 million to $37 million due to higher revenue and lower operating expenses.

Year-to-date, revenue declined by 8%, while GAAP gross margin came in at 43.7% and non-GAAP at 45.2%. Our GAAP and non-GAAP operating expenses declined by 8% and 11%, respectively, on a reported basis and by 16% on a normalized basis. Adjusted EBITDA declined 4% year-over-year, better than our revenue performance due to our expense discipline.

Our balance sheet remains strong as our net cash balance increased by $30 million sequentially to end the quarter at $254 million, which includes $53 million of marketable securities as we hold excess cash in short duration treasury bills. We also have $100 million undrawn revolving credit facility at our disposal. Q3 free cash flow was $33 million, an increase from negative $65 million last quarter. CapEx was $5 million, down from $6 million last quarter. We paid $3.5 million of cash tariffs in Q3, a bit below the low end of our $5 million to $10 million guidance due to lower-than-planned inventory purchase pull forward.

Our period-end inventory balance decreased 17% sequentially to $115 million, primarily due to lower finished goods. On a year-over-year basis, this was a 25% decrease, primarily due to lower component balances. Our inventory consists of $93 million of finished goods and $22 million of components. As we noted last quarter, our near-term priority is navigating this dynamic and uncertain environment with ample liquidity to preserve operational flexibility. As a result, we paused our repurchase activities in Q3.

Returning capital to shareholders remains a key pillar of our capital allocation framework, and we have $150 million remaining on our current share repurchase authorization available at our disposal.

Turning to our guidance. The Q4 outlook we're providing today reflects the demand trends we have observed quarter-to-date and does not assume any material change in consumer purchasing behavior as a result of this highly dynamic global trade environment. We expect Q4 revenue to be in the range of $260 million to $290 million, up 2% to 14% year-over-year. We're not guiding Q1 at this time, but I would note that due to the launch timing of Arc Ultra and Sub 4 in Q1 of fiscal 2025, we have a difficult year-over-year comparison.

Also, as Tom mentioned earlier, we will be raising prices on certain products later this year. We have carefully formulated our pricing plan in support of our goal to optimize for gross profit dollars. However, it is difficult to accurately predict how our pricing and overall market demand may impact unit sales volume in this dynamic environment. If not for the uncertainty introduced by our contemplated pricing changes, we have been expecting our year-over-year comparison would improve from Q1 through the balance of fiscal 2026. We expect our Q4 GAAP gross margin to be in the range of 42% to 44%, with non-GAAP gross margin in the range of 43.7% to 45.5%. Our gross margin guidance embeds our expectation that tariff expenses will be approximately $5 million in Q4, which is around 180 basis point headwind to gross margin, mostly representing the previous 10% tariff as well as inventory on hand.

On a cash basis, we expect to pay $8 million to $10 million in Q4 as we build inventory ahead of our holiday quarter. This estimate is lower than our previous $20 million to $30 million estimate based on new tariff rates and the timing of the effective dates. And while we're not guiding Q1 at this time, we expect our GAAP and non-GAAP gross margin will be above 40% for the quarter, even with the newly announced tariff rates due to our mitigation actions.

We expect Q4 GAAP operating expenses to be in the range of $150 million to $155 million, down 13% to 10% from $172 million in Q4 last year. We expect non-GAAP operating expenses to be in the range of $130 million to $135 million, down 9% to 6% from $143 million in Q4 last year and roughly flat sequentially.

This decline is less than 15% decline we saw in Q3, primarily due to lower variable compensation expenses in Q4 of last year. On a normalized basis, our guidance implies non-GAAP operating expenses will decline by 23% to 20% from Q4 of last year. Bringing it all together, we expect Q4 adjusted EBITDA to be in the range of minus $10 million to positive $14 million, representing a margin of approximately minus 4% to plus 5% and an improvement from negative $22.6 million in Q4 of last year.

Please note that the adjusted EBITDA figures I just quoted include the $5 million tariff impact I outlined while discussing gross margin. Our Q4 guidance implies that our full year adjusted EBITDA will be between $116 million to $140 million, an increase of 8% to 30% year-over-year from $108 million in fiscal 2024. Growing adjusted EBITDA, while top line declines between 7% to 5% is a direct result of our transformation efforts.

This marks our fourth consecutive quarter of delivering on our top and bottom line guidance while navigating through a volatile and uncertain macro environment, thanks to the dedication and hard work of our employees. We continue to work hard on our transformation efforts to improve operational efficiency to drive profitability and enable investments for our future growth. We will provide more updates in future quarters.

Speaking of future growth, although our growth markets represent a small share of our revenue today, we remain encouraged by their growth performance that will be our key contributor to our growth in the years to come. We also continue to see tremendous opportunities to grow within our developed markets. We have been navigating a cyclical dancing in our category for some time, and we are confident that we are well positioned when the cycle rebounds as we continue to invest in the core experience and build out the Sonos platform.

We're excited to have Tom officially as our CEO as his appointment marks the beginning of a new chapter to capitalize on our brand and leadership in wireless audio. With only a small fraction of the global market captured so far, there is a vast opportunity to introduce the compounding value of the Sonos platform to new customers. After the call, we will update our earnings slides to reflect our Q4 guidance and our revised tariff exposure expectations. With that, I'd like to turn the call over for questions.

[Operator Instructions]

We'll go first to Steve Frankel at Rosenblatt.

Congratulations, Tom. Maybe just start with some high-level insights on how you think about new product introductions. Prior to your appointment, the company was pretty set on introducing a couple of new pieces of hardware per year. You seem to be emphasizing software. So should we think about software innovation being as important in terms of new products to drive growth as new hardware products?

Sure. Thanks, and it's great to be on the call as the CEO for the first time. I continue to think that a cadence of 2 new products a year is an excellent outcome for Sonos and its customers. And so there's really no change in our ambition in that regard. I will say, though, that we are, as you know, in the process of navigating tremendous reinvention here at Sonos and it takes time to drive change. And the beauty of software is that you have shorter lead times and the benefits of upgrades to the software platform can appear more quickly. Hardware, of course, has much longer cycles.

And so while it's true that today, I think we have the strongest product portfolio in our history across every room of the home and beyond. Our attention to software reliability and core experience over the last 15 months has created a kind of lull in new hardware releases coming over the next couple of quarters. So in the short term, you will see us work hard to drive differentiation and experience improvements to support the current portfolio through software upgrades.

Having said all of that, we all here at Sonos remain incredibly excited about our product road map with great new product introductions that will pick up in the second half of 2026. So expect in terms of near-term execution, continuing to deliver excellence in core experience, driving new customer acquisition and repurchase, look to us to sharpen our ability to tell the Sonos story, as Saori described, expanding and promising new geographies, maturing our relationship with installer channels and driving success in the new categories we've entered recently like headphones.

Right. And Saori, the last couple of quarters, there's been a lot of discussion about reducing costs, and you've done a great job. Are we towards the end of that journey? Or do you think excluding tariffs, there's more costs you can take out of the business to drive margin improvement as volumes return?

Thank you, Steve. We are still on our journey of our -- as we've been calling it transformation, but really driving cost structure and cost efficiency to be able to invest for the future. So our work continues, and we'll be -- we hope to be able to share more in the future quarters.

We'll move next to Erik Woodring at Morgan Stanley.

And same, Tom, you are clearly deserving of the role, and so congrats on becoming the permanent CEO. I would love to maybe, Tom, I realize that it's early and this is maybe a tough question to answer, but you guys last quarter communicated a strategy of kind of trying to widen your aperture from a pricing and promotion perspective to kind of get new households in the door. Obviously, once they come in, there's a very powerful flywheel. Now obviously, tariffs are kind of forcing your hand a bit from a pricing perspective.

Can you maybe just give us a little bit more detail or direction on exactly how you think about what products should be higher priced because of tariff, what products maybe you don't want to adjust pricing because of some of this pricing strategy? Just love to get a little bit more flavor of how you're thinking about pricing increases versus tariffs. And then I have a follow-up, please.

I'm not sure that on this call, we're going to go into more detail about the specifics of the pricing changes that we're making beyond just saying that, of course, we're evaluating each of the products in the line, contemplating our sense of elasticity and effect on demand as we make pricing changes.

I think the best way to think about what we're trying to do here strategically is to craft a pricing plan that supports our goal of optimizing gross profit dollars. We certainly will be paying close attention to how our customers respond to these pricing changes as well as the competitive trends across the portfolio in our categories.

And then I'll just say, we really believe that our portfolio of hardware products deliver truly exceptional value that compounds over time, thanks to the kinds of software updates that deliver new experiences. Just this quarter, we shipped AI speech enhancement for Arc Ultra, multi-user swap for Ace in home theater, new room tuning capabilities for Ace. So our customers benefit from products that improve over time after their purchase. And we think that, that puts us in a good position as we have to modulate pricing relative to our competitors who are so often are delivering commodity experiences.

Okay. Okay. Totally fair. Understood. And then I'd love as a follow-up, maybe just if you could kind of touch on the high-level kind of market backdrop as you see it today and maybe where you see it going, again, I realize there's a lot of variables that go into the forward look. But do you see the environment getting better? Is it deteriorating? Anything by geography that you would call out? Would just love to know kind of what's going on behind the scenes kind of outside of what you guys can actually control.

Sure. It is -- continues to be the case that the category remains cyclically challenged coming off of COVID pull-in and weak housing data as just 2 headwinds. On the other hand, more people are consuming content at home than ever before. More people are subscribing to digital music and video streaming services than ever before. More people are interacting with technology through voice and conversational AI than ever before.

And I really think that in time, all of these trends are going to drive a return to growth for the category, and I think we're uniquely positioned to capture that growth when it returns. So we're working hard in this sort of cyclical downturn to drive share through strong execution in innovation. You see that with Arc Ultra driving year-over-year gains in home theater in the U.S. this quarter on the backs of the SoundMotion technology that we brought to market. And you'll continue to see us work hard in that lane while we wait for what we think is the inevitable return of category demand.

Super thanks. And maybe just last question, and then I'll get back in the queue for you, Saori, and kind of a similar question to my predecessor, which is last quarter, you guys talked about $580 million to $600 million of non-GAAP OpEx as kind of your target annualized run rate. I think you are actually already below that right now if we kind of take fiscal '25 in totality.

And so I know you're not going to necessarily guide for fiscal '26, but is $580 million to $600 million still the target run rate? Is it below that? I'd love if you could just share a bit more context about kind of what that target is, if it has changed at all?

Thanks, Erik. Yes, we're still -- we continue to still work on our efforts to optimize our cost structure. Part of it, we obviously want to reinvest into the business for the future growth. And so we're not guiding to an FY '26 OpEx today. However, I do want to call out part of what I mentioned on the prepared remarks that the resulting impact to even FY '25 adjusted EBITDA, we expect to grow 8% to 30% year over year on our bottom line for this year and as you will recall, we had our reduction in force both last August as well as even a larger on in February. So we are not seeing a full year impact of those activities that we've taken place to improve our cost structure this year in FY '25 and we expect that to fully materialize into FY '26 as well. But again, we're balancing with where we want to invest for our future as well as flowing it through to the bottom line, but we expect to continue to improve our profitability. And we believe this business can expand both top and the bottom line.

[Operator Instructions]

We'll go next to Brent Thill at Jefferies.

This is Rayyana Matraji on for Brent Thill. Congrats, Tom. Can you speak to how Sonos is leveraging AI to enhance the product or app experience? And do you think this could be a meaningful differentiator or monetization driver over time?

Let me start by talking just a little bit about what I think of as the sort of the fundamental strengths of the Sonos' capability. We have best-in-class sound quality and industrial design. We invented the multi-room architecture that's defined the standard for customers everywhere.

We have this incredibly broad portfolio of premium form factors for every room and beyond. And the power of this ecosystem is really the software platform that connects all of those products with our partners and developers and our customers in truly unique and differentiated ways.

And I think what you're touching on is why I'm so excited about where this platform can go from here. I think our hardware and software is incredibly well positioned to deliver the next generation of conversational AI experiences in the home.

So I think the way to think about it is that Sonos isn't and has never been a company that sells a loose collection of speakers. Today, we're building a next-generation platform that we think will define how people experience sound and interaction in the home for the next decade and beyond. And of course, as a footnote, I should say that the company operationally is being transformed by the use of AI technology across all of our departments from engineering, certainly through marketing and legal and customer experience.

So we have a really big vision for AI, both in terms of increasing our operation agility as well as delivering incredible one-of-a-kind experiences in our customers' homes.

And that will complete our question-and-answer session. This concludes today's conference call. We thank you for your participation. You may now disconnect.