Investors are tuning out Sonos after a disappointing quarter

Sonos stock is still struggling to recover after a disappointing earnings report sent shares of the audio hardware manufacturing company plummeting.

The stock is currently down over 18 percent in trading on the Nasdaq after yesterday’s news that the company lost 45 cents per share on revenues  of roughly $208 million for the quarter.

The losses put Sonos on pace for its worst day since debuting on the public markets in August.

Revenue was down pretty sharply on an annual basis thanks to declining sales of the company’s Playbase audio streaming service (that retails for $699), which Sonos rolled out last year. And while the company’s speaker business posted a small gain in sales, it wasn’t enough to offset Sonos’ costs because the Sonos One smart speaker only sells for $199.

So it’s not just that the company is less profitable, but that it’s less profitable because Sonos is selling more of its less profitable services.

In fact, even though Sonos sold 11 percent more products on annual basis, its revenues fell because of the drop in average selling prices.

Despite the grim quarterly numbers, Sonos executives assured analysts that the company would be on track to hit revenue of $1.11 billion for the year (roughly in line with Wall Street expectations).

Here’s what Sonos chief executive Patrick Spence had to say about the losses.

Despite the double-digit percentage increase in products sold, revenue declined 6.6% compared to Q3 of FY2017. This dynamic between year-over-year product unit growth and year-over-year revenue decline can be caused by our new product launches and/or product mix. When we launch a new product, two things happen that can impact quarterly comparability: 1) initial new product channel fill can create higher revenue levels relative to a typical quarter; and, 2) although channels are typically filled two to six weeks before general availability, revenue is not recognized until the date of general availability, which can push revenue resulting from channel fill into one quarter, thus accentuating new product launch impact.

In Q3 FY2018, the largest driver impacting our year-over-year revenue decline was the Q3 FY2017 launch of our PLAYBASE product. PLAYBASE revenue was approximately $18 million lower in Q3 FY2018 than Q3 FY2017, the quarter in which PLAYBASE launched. In addition to the product launch dynamics discussed above, overall product mix also impacted quarterly comparability. Our Q3 FY2018 product unit growth was driven by a 25% increase in wireless speaker products sold, and primarily by the Sonos One, a product launched in Q1 FY2018 which carries a $199 U.S. manufacturer’s suggested retail price (U.S. MSRP). The decreasing share of the $699 U.S. MSRP PLAYBASE and increasing share of Sonos One further explains the difference between quarterly product unit growth and the decline in revenue, compared to Q3 FY2017.

With the disappointing results, Sonos runs the risk of finding itself on a path that’s already been traveled by other once-celebrated niche hardware makers before it like GoPro and FitBit.

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