As filed with the Securities and Exchange Commission on July 6, 2018.

Registration No. 333-            

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

SONOS, INC.

(Exact name of registrant as specified in its charter)

Delaware	3577	03-0479476
(State or other jurisdiction of incorporation or organization)	(Primary standard industrial code number)	(I.R.S. employer identification no.)

614 Chapala Street

Santa Barbara, CA 93101

(805) 965-3001

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Patrick Spence

Chief Executive Officer

Sonos, Inc.

614 Chapala Street

Santa Barbara, CA 93101

(805) 965-3001

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Jeffrey R. Vetter, Esq. William L. Hughes, Esq. Niki Fang, Esq. Fenwick & West LLP Silicon Valley Center 801 California Street Mountain View, CA 94041 (650) 988-8500 Craig A. Shelburne, Esq. Chief Legal Officer and Corporate Secretary Sonos, Inc. 614 Chapala Street Santa Barbara, CA 93101 (805) 965-3001 Kevin P. Kennedy, Esq. Simpson Thacher & Bartlett LLP 2475 Hanover Street Palo Alto, CA 94304 (650) 251-5000

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
(Do not check if a smaller reporting company)		Emerging growth company	☒
		If an emerging growth company, indicate by checkmark if the registrant has not elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act	☒

CALCULATION OF REGISTRATION FEE

Title of Securities to be Registered	Proposed Maximum Aggregate Offering Price(1)(2)	Amount of Registration Fee
Common Stock, par value $0.001 per share	$100,000,000.00	$12,450.00

(1) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

(2) Includes the aggregate offering price of additional shares the Underwriters have the option to purchase to cover over-allotments, if any.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and neither we nor the selling stockholders are soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

PROSPECTUS (Subject to Completion)

Issued July 6, 2018

             Shares

COMMON STOCK

Sonos, Inc. is offering              shares of its common stock and the selling stockholders are offering              shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price will be between $         and $         per share.

We have applied to list our common stock on The Nasdaq Global Select Market under the symbol “SONO.”

We are an “emerging growth company” as defined under the federal securities laws. Investing in our common stock involves risks. See “Risk Factors” beginning on page 14.

PRICE $             A SHARE

	Price to Public		Underwriting Discounts and Commissions(1)		Proceeds to Sonos		Proceeds to Selling Stockholders
Per Share		$		$		$		$
Total		$		$		$		$

(1) See the section titled “Underwriting (Conflicts of Interest)” for a description of the compensation payable to the underwriters.

We and certain of the selling stockholders have granted the underwriters the right to purchase up to an additional              shares of common stock to cover over-allotments, if any.

The Securities and Exchange Commission and state regulators have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to purchasers on or about                     , 2018.

MORGAN STANLEY    GOLDMAN SACHS & CO. LLC   ALLEN & COMPANY LLC

RBC CAPITAL MARKETS	JEFFERIES	KKR
RAYMOND JAMES		STIFEL

                    , 2018

The Smart Home Sound System SONOS The Home Sound System

TV, movies and music. Sound that brings you together. The new Sonos Beam with Amazon Alexa SONS

Sonos One The smart speaker for music lovers. SONOS

TABLE OF CONTENTS

	Page
Prospectus Summary		1
A Letter from Our CEO		11
Risk Factors		14
Special Note Regarding Forward-Looking Statements		38
Market, Industry and Other Data		39
Use of Proceeds		40
Dividend Policy		40
Capitalization		41
Dilution		43
Selected Consolidated Financial and Other Data		45
Management’s Discussion and Analysis of Financial Condition and Results of Operations		49
Business		78
Management		91

	Page
Executive Compensation		98
Certain Relationships and Related-Party Transactions		106
Principal and Selling Stockholders		108
Description of Capital Stock		110
Shares Eligible for Future Sale		116
Material U.S. Federal Income Tax Considerations for Non-U.S. Holders of Common Stock		118
Underwriting (Conflicts of Interest)		123
Legal Matters		132
Experts		132
Where You Can Find Additional Information		132
Index to Consolidated Financial Statements		F-1

Neither we, the selling stockholders nor any of the underwriters have authorized anyone to provide you with additional information or information that is different from or to make any representations other than those contained in this prospectus or in any free-writing prospectus prepared by or on behalf of us to which we may have referred you in connection with this offering. We, the selling stockholders and the underwriters take no responsibility for, and can provide no assurances as to the reliability of, any other information that others may give you. We and the selling stockholders are offering to sell, and seeking offers to buy, our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Our business, financial condition, results of operations and future growth prospects may have changed since that date.

Unless the context requires otherwise, the terms “we,” “us,” “our,” “the Company” and “Sonos” refer to Sonos, Inc., a Delaware corporation, together with its consolidated subsidiaries, unless otherwise noted. For purposes of this prospectus, unless the context otherwise requires, the term “stockholders” shall refer to the holders of our common stock.

Through and including                     , 2018 (the 25^th day after the date of this prospectus) U.S. federal securities laws may require all dealers that effect transactions in our common stock, whether or not participating in this offering, to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside the United States, neither we, the selling stockholders nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus and any such free-writing prospectus outside the United States.

PROSPECTUS SUMMARY

This summary highlights information contained in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider in making your investment decision. You should read the entire prospectus carefully before making an investment in our common stock. You should carefully consider, among other things, our consolidated financial statements and related notes and the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

SONOS, INC.

Company Overview

Sonos was founded with a clear mission—to fill every home with music. This mission led us to invent wireless multi-room home audio. Sonos transforms the way people live and interact by restoring the shared experience of music throughout the home. Our home sound system provides an immersive listening experience created by our thoughtfully designed speakers and components, our proprietary software platform and the ability to wirelessly stream the content our customers love from the services they prefer.

Sonos sits at the intersection of emerging trends driving the future of home entertainment. The proliferation of streaming services and the rapid adoption of voice assistants are significantly changing audio consumption habits and how consumers interact with the internet. As the leading home sound system for consumers, content partners and developers, Sonos is poised to capitalize on the large market opportunity created by these dynamics.

We debuted the world’s first wireless multi-room home sound system in 2005, and have since been a leading innovator in wireless home audio. Today, our products include wireless speakers, home theater speakers and components to address consumers’ evolving home audio needs. We launched our first voice-enabled wireless speaker, Sonos One, in October 2017, and our first voice-enabled home theater speaker, Sonos Beam, in July 2018. In addition to new product launches, we frequently introduce new features through software upgrades, providing our customers with enhanced functionality and improved sound in the home. We are committed to continuous technological innovation, as evidenced by our growing global patent portfolio of over 630 issued patents and 570 applications. We believe our patents comprise the foundational intellectual property for wireless multi-room audio technology.

Our network of partners provides our customers with access to voice control, streaming music, internet radio, podcasts and audiobook content, enabling them to control and listen to an expansive range of home entertainment. Our platform has attracted a broad range of approximately 100 streaming content providers, such as Apple Music, Pandora, Spotify and TuneIn. These partners find value in our independent platform and access to our millions of desirable and engaged customers.

As of March 31, 2018, our customers had registered over 19 million products in approximately 6.9 million households globally. Based on customer data, we estimate that, on average, our customers listen to approximately 70 hours of content per month and to approximately 80% more music after purchasing their first Sonos product. We also estimate that our customers listened to five billion hours of audio content using our products in fiscal 2017, which represents 33% growth from fiscal 2016.

Our innovative products, seamless customer experience and expanding global footprint have driven 12 consecutive years of sustained revenue growth since our first product launch. We generate revenue from the sale of our wireless speakers, home theater speakers and component products, as new customers buy our products and existing customers continue to add products to their Sonos home sound systems. In fiscal 2017, existing customers accounted for approximately 38% of new product registrations. We sell our products primarily

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through over 10,000 third-party physical retail stores, including custom installers of home audio systems. We also sell through select e-commerce retailers and our website sonos.com. Our products are distributed in over 50 countries, with 55% of our revenue in fiscal 2017 generated outside the United States.

We generated revenue of $655.7 million in the six months ended March 31, 2018, an 18% increase from $555.4 million in the six months ended April 1, 2017. For the six months ended March 31, 2018, our net income was $13.1 million and our adjusted EBITDA was $50.5 million. We generated revenue of $992.5 million in fiscal 2017, a 10% increase from $901.3 million in fiscal 2016. In fiscal 2017, our net loss was $14.2 million and our adjusted EBITDA was $56.0 million. See the section titled “Selected Consolidated Financial Data—Non-GAAP Financial Measures” for information regarding our use of adjusted EBITDA.

Market Opportunity

The following trends are changing how people consume entertainment and interact with the internet in the home:

Streaming Driving Transformation in Audio Consumption

Streaming music is fueling the music industry’s growth as it drives increasing music consumption and an expanding breadth of content available to consumers. Futuresource estimates that the number of global paid subscribers to streaming music services grew from 29 million in 2013 to approximately 176 million in 2017, and projects this number to grow to 293 million by 2021. Even with its rapid growth, the number of paid streaming music subscribers represents a fraction of the 858 million households worldwide with broadband internet today, as estimated by Kagan, a media research group within S&P Global Market Intelligence. Increased adoption of streaming music is accelerating consumption of audio content. According to Nielsen, the average number of hours spent listening to music per week in the United States increased 37% in two years to over 32 hours in 2017.

Voice Assistants Disrupting Home Audio

Voice assistants are disrupting the home audio industry by changing what consumers expect from a home speaker. Speakers are now expected to be voice-enabled, software-driven, Wi-Fi-connected computers that can fulfill requests for any audio content, answer questions or complete tasks by listening and responding. Industry research projects that by 2022, 50% of all web searches will be voice searches and 55% of U.S. households will have at least one voice-enabled speaker.

These trends provide a glimpse into the opportunity for consumers to enjoy what we call the Sonic Internet—where the internet’s sound content, such as music, movies, TV shows, video games, podcasts and virtual and augmented reality, can be controlled by voice and played out loud in the home. Existing products from traditional home audio companies and diversified technology companies are not designed to capture the full potential of the Sonic Internet. We believe there is a significant opportunity to provide a seamless sound experience that brings connectivity, freedom of content choice, ease of use and high-fidelity sound to the connected home.

Our Solution

Since our founding, we have focused on creating and enhancing a reliable, wireless multi-room home sound system that simply works. The Sonos home sound system integrates our speakers, proprietary software platform and a robust partner ecosystem to enable an immersive sound experience throughout the home. We manage the complexity of delivering a seamless customer experience in a multi-user and open-platform environment. The Sonos home sound system is easy to set up, use and expand to bring the Sonic Internet to any room in the home.

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Our Products

Our portfolio of products encourages customers to uniquely tailor their Sonos sound systems to best meet their home sound and design preferences.

• Wireless Speakers. Our wireless speakers include PLAY:1, PLAY:3 and PLAY:5, as well as the recently released Sonos One, which includes native voice control.

• Home Theater Speakers. Our home theater products include speakers and a subwoofer designed to play audio content from TV/video. Our home theater products include PLAYBAR, PLAYBASE and SUB, as well as the recently released Sonos Beam, which includes native voice control.

• Components. Our CONNECT and CONNECT:AMP allow customers to convert third-party wired speakers, stereo systems or home theater setups into our easy-to-use, wirelessly controlled streaming music system.

Our Software

Our proprietary software is the foundation of the Sonos home sound system and further differentiates our products from those of our competitors. Our software provides the following key benefits:

• Multi-Room Experience. Our system enables our speakers to work individually or together in synchronized playback groups, powered by wireless mesh network capabilities to route and play audio optimally.

• Enhanced Functionality Through Software Upgrades. Our platform enables us to understand and enhance our customers’ listening and control experience, delivering feature updates and intelligent customization through remote software upgrades and cloud-based services.

• Intuitive and Flexible Control. Our customers can control their experiences through the Sonos app, voice control or an expanding number of third-party apps and smart devices. As our customers navigate across different controllers, our technology synchronizes the control experience across the Sonos platform to deliver the music and entertainment experience they desire.

• Advanced Acoustics. We have made significant investments in our engineering team and audio technology, which have enabled us to create speakers that produce high-fidelity sound. For example, we invented technology to allow two of our speakers to pair wirelessly and create multi-channel sound, thereby enabling a much broader sound field. In addition, our Trueplay technology utilizes the microphones on an iOS device to analyze room attributes, speaker placement and other acoustic factors in order to improve sound quality.

Our Partner Ecosystem

We have built a platform that attracts partners to enable our customers to play the content they love from the services they prefer. Our partners span across content, control and third-party applications:

• Content. We partner with a broad range of content providers, such as streaming music services, internet radio stations and podcast services, allowing our customers to enjoy their audio content from whichever source they desire.

• Control. We provide our customers with multiple options to control their home audio experiences, including voice control and direct control from within selected streaming music service apps.

• Third-Party Applications. We partner with third-party developers, including home automation integrators such as Crestron. These partners are building new applications and services on top of the Sonos platform, increasing customer engagement and creating new experiences for our customers.

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Our Competitive Strengths

We believe the following combination of capabilities and features of our business model distinguish us from our competitors and position us well to capitalize on the opportunities created by the Sonic Internet:

• Leading Home Sound System. We have developed and refined our home sound system with a singular focus for over 15 years. Our effort has resulted in significant consumer awareness and market share among home audio professionals. For example, a 2018 product study by a leading home audio publication of the top 100 custom integrator professionals ranked Sonos as the leading brand in the wireless audio, soundbar and subwoofer categories. Our 84% share in the wireless audio category among these industry professionals significantly outpaces our competitors.

• Platform Enables Freedom of Choice for Consumers. Our broad and growing network of partners provides our customers with access to voice control, streaming music, internet radio, podcasts and audiobook content, enabling them to listen to the content they love from the services they prefer. Our platform attracts a broad set of content providers, including leading streaming music services, and third-party developers.

• Differentiated Consumer Experience Creates Engaged Households. We deliver a differentiated customer experience to millions of households every day, cultivating a passionate and engaged customer base. Based on customer data, we estimate that, on average, our customers listen to approximately 70 hours of content per month and to approximately 80% more music after purchasing their first Sonos product. Long-term engagement with our products and our ability to continuously improve the functionality of our existing products through software updates leads to attractive economics as customers add products to their Sonos home sound systems.

• Commitment to Innovation Drives Continuous Improvement. We have made significant investments in research and development for over 15 years, and believe that we own the foundational intellectual property of wireless multi-room audio. We have significantly expanded the size of our patent portfolio in recent years. In 2017, the strength of our patent portfolio placed us 2^nd in Electronics and 19^th overall in IEEE’s Patent Power Report.

• Home Sound System Expansion Drives Attractive Financial Model. We generate significant revenue from customers purchasing additional products to expand their Sonos home sound systems, which has contributed to 12 consecutive years of sustained revenue growth. Existing households represented approximately 38% of new product registrations in fiscal 2017. We believe this aspect of our financial model will continue to be critical in sustaining our revenue growth over the long term.

Our Growth Strategies

Key elements of our growth strategy include:

• Consistently Introduce Innovative Products. To address our market opportunity, we have developed a long-term roadmap to deliver innovative products and software enhancements, and intend to increase the pace of product introductions across multiple categories. Executing on our roadmap will position us to acquire new customers, increase sales to existing customers and improve the customer experience.

• Invest in Geographic Expansion. Geographic expansion represents a significant growth opportunity in currently unserved countries. We intend to expand into new countries by employing country-specific marketing campaigns and distribution channels.

• Build Direct Relationships with Existing and Prospective Customers. We intend to continue to build direct relationships with current and prospective customers through sonos.com and the Sonos app to drive direct sales.

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• Expand Partner Ecosystem to Enhance Platform. We intend to deepen our relationships with our current partners and expand our partner ecosystem to provide our customers access to streaming music services, voice assistants, internet radio, podcasts and audiobook content. For example, we recently introduced voice control with Amazon’s Alexa technology, and plan to incorporate Apple’s Siri via Airplay 2 and Google Assistant in 2018.

• Increase Brand Awareness in Existing Geographic Markets. We intend to increase our household penetration rates in our existing geographic markets by investing in brand awareness, expanding our product offerings and growing our partner ecosystem.

Risks Related to Our Business and Investment in Our Common Stock

Investing in our common stock involves a high degree of risk. You should carefully consider the risks highlighted in the section titled “Risk Factors” beginning on page 14 before making an investment decision. We may be unable for many reasons, including those that are beyond our control, to implement our business strategy successfully. Some of these risks are that:

• we have a recent history of losses and expect to incur increased operating costs in the future, and we may not achieve or sustain profitability;

• the pace of our revenue growth has been volatile and we cannot assure you that we will continue to achieve consistent revenue growth;

• our operating results depend on a number of factors and are likely to fluctuate from quarter to quarter;

• the voice-enabled speaker market is in its early stages of development and may not continue to grow, and we may not be able to establish and maintain market share;

• we may not be able to successfully manage frequent new product introductions and transitions;

• we are dependent on a single contract manufacturer and on a limited number of suppliers, logistics providers and distributors, over which we have limited or no control;

• we operate in highly competitive markets and we are dependent on partners who offer products that compete with our own;

• we may not be able to accurately anticipate market demand for our products, and we may have difficulty managing our production and inventory as a result;

• our sales are subject to seasonality and our sales in high-demand periods may be below our forecasts;

• the imposition of tariffs and other trade barriers, as well as retaliatory trade measures, could require us to raise the prices of our products and harm our sales; and

• we may lose one or more of our key personnel, or fail to attract and retain other highly qualified personnel.

If we are unable to adequately address these and other risks we face, our business, financial condition, operating results and prospects may be adversely affected.

Corporate Information

We incorporated in Delaware in August 2002 as Rincon Audio, Inc. and we changed our name to Sonos, Inc. in May 2004. We had 1,478 full-time employees as of March 31, 2018. Our principal executive offices are located at 614 Chapala Street, Santa Barbara, California 93101, and our telephone number is (805) 965-3001. Our website address is www.sonos.com. The information on, or that can be accessed through, our website is not incorporated by reference into this prospectus and should not be considered part of this prospectus. Investors should not rely on any such information in deciding whether to purchase our common stock.

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Sonos, the Sonos logo, Sonos One, Sonos Beam, PLAY:1, PLAY:3, PLAY:5, PLAYBASE, PLAYBAR, CONNECT, CONNECT:AMP, SUB and our other registered or common law trademarks, tradenames or service marks appearing in this prospectus are our property. Solely for convenience, our trademarks, tradenames and service marks referred to in this prospectus appear without the ^®, ™ and ^SM symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trademarks, tradenames and service marks. This prospectus contains additional trademarks, tradenames and service marks of other companies that are the property of their respective owners.

Implications of Being an Emerging Growth Company

As a company with less than $1.07 billion in revenue during our last completed fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements that are otherwise applicable generally to public companies. These reduced reporting requirements include:

• an exemption from compliance with the auditor attestation requirement on the effectiveness of our internal control over financial reporting;

• an exemption from compliance with any requirement that the Public Company Accounting Oversight Board, or the PCAOB, has adopted regarding a supplement to the auditor’s report providing additional information about the audit and the financial statements;

• reduced disclosure about our executive compensation arrangements;

• an exemption from the requirements to obtain a non-binding advisory vote on executive compensation or a stockholder approval of any golden parachute arrangements; and

• extended transition periods for complying with new or revised accounting standards.

We will remain an emerging growth company until the earliest to occur of: (i) the end of the first fiscal year in which our annual gross revenue is $1.07 billion or more; (ii) the end of the first fiscal year in which we are deemed to be a “large accelerated filer,” as defined in the Securities Exchange Act of 1934, as amended, or the Exchange Act; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; and (iv) the end of the fiscal year during which the fifth anniversary of this offering occurs. We may choose to take advantage of some, but not all, of the available benefits under the JOBS Act. We are choosing to irrevocably “opt out” of the extended transition periods available under the JOBS Act for complying with new or revised accounting standards, but we currently intend to take advantage of the other exemptions discussed above. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.

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THE OFFERING

Common stock offered by us	shares
Common stock offered by the selling stockholders	shares
Total common stock offered	shares
Common stock to be outstanding after this offering	shares
Over-allotment option	shares
Use of proceeds	We intend to use the net proceeds of this offering for working capital and other general corporate purposes. We may also use a portion of the net proceeds to acquire or invest in complementary businesses, products, services, technologies or assets. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders. See “Use of Proceeds.”
Risk factors	See “Risk Factors” beginning on page 14 and other information included in this prospectus for a discussion of factors that you should consider carefully before deciding to invest in our common stock.
Conflicts of interest	Affiliates of KKR Capital Markets LLC own more than 10% of our common stock. Because KKR Capital Markets LLC is an underwriter for this offering, it is deemed to have a “conflict of interest” within the meaning of FINRA Rule 5121(f)(5)(B). Accordingly, this offering is being made in compliance with the requirements of FINRA Rule 5121. Since KKR Capital Markets LLC is not primarily responsible for managing this offering, pursuant to FINRA Rule 5121, the appointment of a qualified independent underwriter is not necessary. KKR Capital Markets LLC will not confirm sales to discretionary accounts without the prior written approval of the account holder. See “Underwriting (Conflicts of Interest).”
Proposed Nasdaq trading symbol	“SONO”

The number of shares of common stock to be outstanding after this offering is based on 46,195,324 shares of common stock outstanding as of March 31, 2018, and excludes:

• 22,893,310 shares of our common stock issuable upon the exercise of stock options outstanding under our 2003 Stock Plan as of March 31, 2018, with a weighted-average exercise price of $19.25 per share;

• 2,507,740 shares of our common stock issuable upon the exercise of stock options granted after March 31, 2018, with an exercise price of $30.21 per share;

• 375,370 shares of our common stock reserved for future issuance under our 2003 Stock Plan as of March 31, 2018 (subsequent to March 31, 2018, the number of shares of common stock reserved for future issuance under our 2003 Stock Plan was increased by 2,000,000 shares); and

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• 12,000,000 additional shares of our common stock reserved for future issuance under our equity compensation plans, consisting of:

• 10,600,000 shares of our common stock reserved for future issuance under our 2018 Equity Incentive Plan, which will become effective in connection with this offering; and

• 1,400,000 shares of our common stock reserved for future issuance under our 2018 Employee Stock Purchase Plan, or our ESPP, which will not become effective immediately but instead allows our compensation committee to select a future date, if at all, upon which to implement our ESPP.

On the date immediately prior to the date of this prospectus, any remaining shares available for issuance under our 2003 Stock Plan will be added to the shares of our common stock reserved for issuance under our 2018 Equity Incentive Plan, and we will cease granting awards under the 2003 Stock Plan. Each of our 2018 Equity Incentive Plan and our ESPP shall contain a provision that will automatically increase the shares of our common stock reserved thereunder each year, as more fully described in “Executive Compensation—Employee Benefit Plans.”

Except as otherwise indicated, all information in this prospectus assumes:

• a             -for-            split of our capital stock;

• the automatic conversion of 16,241,295 shares of our convertible preferred stock into an equivalent number of shares of common stock immediately prior to the completion of this offering;

• no exercise or cancellation of outstanding stock options subsequent to March 31, 2018;

• the filing and effectiveness of our restated certificate of incorporation, which will occur immediately prior to the completion of this offering; and

• no exercise by the underwriters of their over-allotment option to purchase up to an additional                  shares of our common stock in this offering from us and the selling stockholders.

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables summarize our consolidated financial and other data. We have derived the summary consolidated statements of operations data for the fiscal years ended October 3, 2015, October 1, 2016 and September 30, 2017 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the summary consolidated statements of operations data for the six months ended April 1, 2017 and March 31, 2018 and the summary consolidated balance sheet data as of March 31, 2018 from our unaudited consolidated interim financial statements included elsewhere in this prospectus. Our unaudited consolidated interim financial statements were prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, on the same basis as our audited consolidated financial statements and include, in the opinion of management, all adjustments, consisting of normal recurring adjustments, that are necessary for the fair statement of the financial information set forth in those financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future, and results for the six months ended March 31, 2018 are not necessarily indicative of results that may be expected for the full fiscal year or any other period. You should read this data together with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.

	Fiscal Year Ended									Six Months Ended
	Oct. 3, 2015			Oct. 1, 2016			Sept. 30, 2017			Apr. 1, 2017			Mar. 31, 2018
	(in thousands, except per share amounts and percentages)
Consolidated Statements of Operations Data:
Revenue	$	843,524		$	901,284		$	992,526		$	555,353		$	655,670
Cost of revenue(1)		461,387			497,885			536,461			309,467			378,128
Gross profit		382,137			403,399			456,065			245,886			277,542
Operating expenses
Research and development(1)		100,653			107,729			124,394			57,573			68,766
Sales and marketing(1)		272,427			258,012			270,162			137,151			153,258
General and administrative(1)		64,805			68,531			77,118			35,032			42,959
Total operating expenses		437,885			434,272			471,674			229,756			264,983
Operating income (loss)		(55,748	)		(30,873	)		(15,609	)		16,130			12,559
Other income (expense), net
Interest expense, net		(156	)		(2,489	)		(4,260	)		(2,001	)		(2,250	)
Other income (expense), net		(9,631	)		(2,208	)		3,361			(928	)		3,429
Total other income (expense), net		(9,787	)		(4,697	)		(899	)		(2,929	)		1,179
Income (loss) before provision for (benefit from) income taxes		(65,535	)		(35,570	)		(16,508	)		13,201			13,738
Provision for (benefit from) income taxes		3,242			2,644			(2,291	)		(2,026	)		633
Net income (loss)	$	(68,777	)	$	(38,214	)	$	(14,217	)	$	15,227		$	13,105
Net income (loss) per share attributable to common stockholders, basic(2)	$	(2.68	)	$	(1.42	)	$	(0.50	)	$	0.18		$	0.13
Net income (loss) per share attributable to common stockholders, diluted(2)	$	(2.68	)	$	(1.42	)	$	(0.50	)	$	0.15		$	0.11
Weighted-average shares used in computing net income (loss) per share attributable to common stockholders, basic(2)		25,627			26,937			28,157			27,749			29,595
Weighted-average shares used in computing net income (loss) per share attributable to common stockholders, diluted(2)		25,627			26,937			28,157			36,255			36,683
Pro forma net income (loss) per share attributable to common stockholders, basic(2)							$	(0.32	)				$	0.29
Pro forma net income (loss) per share attributable to common stockholders, diluted(2)							$	(0.32	)				$	0.25
Weighted-average shares used in computing pro forma net income (loss) per share attributable to common stockholders, basic(2)								44,398						45,836
Weighted-average shares used in computing pro forma net income (loss) per share attributable to common stockholders, diluted(2)								44,398						52,924
Other Data:
Products sold		3,401			3,514			3,935			2,377			3,071
Adjusted EBITDA(3)	$	(4,613	)	$	29,413		$	55,955		$	49,100		$	50,511
Adjusted EBITDA margin(3)		(0.5	)%		3.3	%		5.6	%		8.8	%		7.7	%

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(1) Amounts include stock-based compensation expense as follows:

	Fiscal Year Ended						Six Months Ended
	Oct. 3, 2015		Oct. 1, 2016		Sept. 30, 2017		Apr. 1, 2017		Mar. 31, 2018
	(in thousands)
Cost of revenue	$	236	$	211	$	240	$	114	$	107
Research and development		8,186		8,260		13,605		6,607		6,766
Sales and marketing		9,791		11,742		15,086		7,274		8,022
General and administrative		5,064		5,750		7,619		3,429		4,170
Total stock-based compensation expense	$	23,277	$	25,963	$	36,550	$	17,424	$	19,065

(2) See note 12 of the notes to our consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of our net income (loss) per share attributable to common stockholders, basic and diluted, and pro forma net income (loss) per share attributable to common stockholders, basic and diluted.

(3) Adjusted EBITDA and adjusted EBITDA margin are financial measures that are not calculated in accordance with U.S. GAAP. See the section titled “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures.”

	As of March 31, 2018
	Actual			Pro Forma(1)			Pro Forma as Adjusted(2)(3)
	(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	117,804		$	117,804		$
Working capital		117,767			117,767
Total assets		351,743			351,743
Total long-term debt		39,657			39,657
Total liabilities		225,279			225,279
Redeemable convertible preferred stock		90,341			—
Accumulated deficit		(174,902	)		(174,902	)
Total stockholders’ equity		36,123			126,464

(1) The pro forma column reflects the automatic conversion of 16,241,295 shares of our convertible preferred stock into an equivalent number of shares of common stock immediately prior to the completion of this offering.

(2) The pro forma as adjusted column reflects (i) the items described in footnote (1) above and (ii) the sale and issuance of                  shares of our common stock by us in this offering, at the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

(3) Each $1.00 increase or decrease in the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease our cash and cash equivalents, working capital, total assets and total stockholders’ equity by approximately $         million, assuming that the number of shares of our common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions payable by us. Each increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease the amount of our cash and cash equivalents, working capital, total assets and total stockholders’ equity by approximately $         million, assuming an initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of our initial public offering that will be determined at pricing.

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A LETTER FROM OUR CEO

By inventing and building the wireless home sound system, Sonos has changed the way people listen to music. We’ve made it easy for everyone to experience amazing sound quality in every room—to enjoy their favorite songs, to discover new music and to share the experience with everyone in their home.

People become increasingly invested in their Sonos systems over time: last year, a full 38 percent of our new product registrations came from existing customers who added another speaker. And the staying power of Sonos products is unmatched in consumer electronics. Ninety-three percent of our products registered since 2005 received a software update in the 12 months ended March 31, 2018, which is testimony to how enduring our products are.

Some of those products are in my own home. Back in 2010, my family and I bought our first Sonos speakers: two ZonePlayer S5s. It was a magical experience. I was blown away by how easy they were to set up and use, and by how great they sounded. And it wasn’t long before I noticed them bringing our family a little closer together—and making gatherings at our house a lot more fun. Thanks to Sonos, we listen to more music together, we listen to music throughout our home and any of us can easily use and control the music service we want. The experience made such an impression on me that when I had the opportunity to join the team at Sonos, I eagerly accepted. And in the years that followed, I’ve discovered that the people working here are even more impressive than the products themselves.

Where It All Started

In 2002, a handful of engineers and entrepreneurs set out to invent the world’s first wireless, whole-home audio system. At the time, there were no streaming music services. Most U.S. households were still using dial-up. The technical barriers that stood in the way of their vision were so enormous that other companies decided they simply weren’t worth solving. But the team that became Sonos took them on anyway, because they believed that music lovers should be able to play any song, in any room, with great sound and no wires.

Achieving this meant building a software platform that could distribute audio seamlessly across an entire home—without lag, buffering or network interruptions. It all had to work over Wi-Fi. And it all had to be so intuitive and easy that customers would make the system part of their daily lives.

Progress was grinding, and success was never a guarantee. But persistence paid off—leading to breakthroughs that included the foundational patents for wireless, multi-room home audio and some of the first applications of mesh networking in the audio industry.

The experience taught a powerful lesson—one that’s written deep into our DNA today. At Sonos, we choose to do the hard things that other companies aren’t willing to do, because even the most difficult problems are worth solving when they make life easier for customers.

Today, Sonos systems can be found in more than seven million homes, and the people who own them are so passionate and loyal that they own 2.8 Sonos products on average. This is proof that our strategy of building great experiences as part of a growing system remains the right one.

A Commitment to Being Open

One of the most foundational and enduring commitments we make at Sonos is our commitment to being open. The reason why is simple: we don’t want to limit our customers’ sonic world. We want to broaden it. So we’ve built a software platform that enables hundreds of partners and gives our customers unparalleled freedom

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of choice. Across music services, audiobooks, television and video content, podcasts, voice service and home automation, our software ensures consistency of experience while our hardware delivers unparalleled sound quality.

Our system is not—and never will be—an entry gate into a walled garden. We’re deeply committed to keeping Sonos open to every voice assistant, streaming service and company that wants to build on our platform. This approach is unique in our industry, and it requires substantial investment and long-term thinking. More than half of our product development team are software developers focused on building a platform that remains open, integrates with multiple services and improves over time. We believe this approach will deliver the best outcome over the long run for customers and investors alike.

The Power of the System

Ask most Sonos customers what we build at Sonos, and they’ll say speakers. But ask them about the experience, and they’ll describe a system. They’ll tell you about the way the music follows them around the house, from one speaker to the next. They’ll talk about how a simple, unified set of controls lets them skip a track or raise the volume no matter what room they’re in. They’ll show you the PLAY:5 they brought home in 2009, and the home theater setup they added a couple years back, and then cue up a song to play across the entire system using Amazon’s Alexa voice assistant on the Sonos One they got last week.

All of this is by design. At Sonos, we consider ourselves sonic architects; our goal is to create sound experiences that fit perfectly into our customers’ lives at home, and eventually the places they go.

That means we design hardware and software that prioritizes ease of use and ease of integration. And we make it seamless for our customers to browse different content services, play different things in different rooms and control Sonos however they want—using our app, third-party apps, voice or touch.

The Right Solution for What Comes Next

As you read this, the internet is evolving. Advances in artificial intelligence and voice technology are transforming it from something we tap and scroll to something we talk and listen to—not just on one device, but throughout the spaces where we live, work and travel. Experts believe that half of all web searches will happen through voice within five years.

At the same time, we’re living in a golden age of content. From music to movies to television, there’s a nearly infinite catalogue of creative genius available to us anytime, anywhere. And not only that: we’re witnessing the birth and rebirth of entire audio mediums. Podcasts are sweeping the globe, audiobooks are exploding, radio is resurgent—and we’re confident that demand for this amazing content is only going to grow. It’s clear that people want to listen more, and they want to listen better.

Together, artificial intelligence, voice assistants and an enormous wave of sonic content are giving rise to something greater than the sum of their parts. We call it the Sonic Internet, and it represents an unparalleled opportunity for Sonos and our ecosystem of platform partners.

Smart speakers are the gateway to the Sonic Internet, and the rate of customer uptake exceeds what we saw for smartphones or tablets. I don’t think it’s any secret why. We’re tired of technology that pulls us deeper into our screens, deeper into distraction and deeper down bottomless feeds. Smart speakers offer a radical alternative: they give you exactly what you ask for. Take away the screen, and suddenly you have the freedom to look up and actually be present with the people around you.

We’re only beginning to see what’s possible in that kind of ecosystem. Like the smartphone, the true potential of the Sonic Internet will reveal itself over time—but only if there are companies that have the long-

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term vision to recognize its true possibility, the will and experience to inspire and enable partners and the fortitude to protect it from becoming a series of walled gardens.

Sonos is that company.

We’re Proud to Be Different

Over the past year, smart speakers have become an increasingly crowded product category. Some companies see them as a tool to harvest data, sell ads, push other services or lock customers into a proprietary ecosystem. What none of these companies do is put the listener first—except Sonos. We believe that the imperatives of commerce should never get in the way of the thing listeners really care about: culture. That’s why all of our products are designed around a single goal. We want to help people listen better—and live better.

This is a natural extension of the values that have always guided our work. We believe that the experience comes first, and we don’t rest until we get it right. We believe in being relentlessly progressive and pushing the edge of what’s possible. And we do this in a corporate environment where we practice the Golden Rule, treating our colleagues with equal parts respect and caring candor.

Sonos is home to the most dedicated, brilliant group of people I’ve ever had the opportunity to work with. I’m proud of the place we’ve built and excited for where it takes us next.

We’re In It for the Long Term

At Sonos, we’ve learned the value of doing hard things. We’ve also learned that the hard things take time. You can’t create a new product category or a breakthrough innovation if you’re only looking three months into the future. Industry leadership requires bold ideas and lasting commitments, and we refuse to let short-term opportunism keep us from realizing long-term opportunities.

Our customers have come to expect that of us. We know Sonos owners buy speakers for their home as long-term investments, not annual upgrades—which is why we build our products to last, and improve them over time with software.

Similarly, from an investor perspective, there’s intrinsic value in what we’re building. An amazing 60 percent of our customers are repeat buyers, adding to their Sonos system as their lives grow. It means that a single Sonos product in a home can, over time, become a hub in a network of Sonos products, and often does. And breakthrough products, like Sonos One and Sonos Beam, will show their true value not in one sales season, but over years.

Sonos shareholders should expect the same thing of our company. Short-term fluctuations and uneven product cadences are built into our business model. This means we won’t be right for every investor. But if you share our desire to achieve long-term success, our commitment to being open, our dedication to doing the hard things and our excitement about the potential of the Sonic Internet, then we invite you to join us.

Patrick

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, as well as the other information in this prospectus, including our consolidated financial statements and the related notes, and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before making a decision to invest in our common stock. The occurrence of any of the events or developments described below could materially and adversely affect our business, financial condition, results of operations and growth prospects. In such an event, the market price of our common stock could decline, and you may lose all or part of your investment. Additional risks and uncertainties not currently known to us or that we currently believe are not material may also impair our business, financial condition, results of operations and growth prospects.

Risks Related to Our Business

We have a recent history of losses and expect to incur increased operating costs in the future, and we may not achieve or sustain profitability.

We have experienced net losses in our recent annual periods. In the fiscal years ended October 3, 2015, October 1, 2016 and September 30, 2017, we had net losses of $68.8 million, $38.2 million and $14.2 million, respectively. We had an accumulated deficit of $174.9 million as of March 31, 2018. We expect our operating expenses to increase in the future as we expand our operations and execute on our product roadmap. We plan to make significant future expenditures related to the expansion of our business and our product offerings, including investments in:

• research and development to continue to introduce innovative new products, enhance existing products and improve our customers’ listening experience;

• sales and marketing to expand our global brand awareness, promote new products, increase our customer base and expand sales within our existing customer base; and

• legal, accounting, information technology and other administrative expenses to facilitate our transition to, and sustain our operations as, a public company.

We need to increase our revenue to achieve and maintain profitability in the future. We cannot assure you that our revenue will continue to grow or that it will not decline. In addition, we anticipate that new product introductions will adversely impact our gross margin in the near to intermediate term due to the increasing frequency of these product introductions and their anticipated increased share of our overall product volume. Our revenue may decline or we may incur significant losses for a number of reasons, including the other risks and uncertainties described in these Risk Factors.

The pace of our revenue growth has been volatile, and we cannot assure you that we will continue to achieve consistent revenue growth.

We have experienced volatile revenue growth and demand for our products since launching our first product in 2005. Our revenue grew 75.3% in fiscal 2014 over fiscal 2013, 8.9% in fiscal 2015 over fiscal 2014, 6.8% in fiscal 2016 over fiscal 2015 and 10.1% in fiscal 2017 over fiscal 2016, and our revenue grew 18.1% in the six months ended March 31, 2018 over the six months ended April 1, 2017. Our historical revenue growth rates therefore should not be considered indicative of our future performance. Additionally, because our ability to achieve continued growth will depend on our ability to execute on our product roadmap, we cannot guarantee that our revenue will continue to grow. In order for our revenue growth to continue, and for the volatility of our growth to stabilize, we will need to be successful in determining the market opportunity for new products and developing and delivering products that appeal to consumers and stimulate demand. If we are unable to do so, our revenue may not grow as anticipated or at all, and the trading price of our common stock may decline.

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The volatility of our revenue growth could cause our operating expenses to exceed our revenue in some periods. The unpredictable nature of the growth and expansion of our business and product offerings also places a continuous and significant strain on our management, operational and financial resources. In future periods, we could experience a decline in revenue, or revenue could grow more slowly than we expect, which could have a material negative effect on our operating results and our stock price could be harmed.

Our operating results depend on a number of factors and are likely to fluctuate from quarter to quarter, which makes them difficult to predict and which could cause the trading price of our common stock to decline.

Our operating results and other key metrics have fluctuated in the past and may continue to fluctuate from quarter to quarter. We expect that this trend will continue as a result of a number of factors, many of which are outside of our control and may be difficult to predict, including:

• fluctuations in demand for our products, including seasonal variations;

• the timing and success of new product introductions, which products initially tend to have a lower gross margin;

• the timing and success of new product introductions by our competitors;

• pricing pressure as a result of competition or otherwise;

• shifts in product, geographic or channel mix;

• the imposition of tariffs and other trade barriers, and the effects of retaliatory trade measures;

• delays or disruptions in our supply, manufacturing or distribution chain;

• fluctuations in costs and availability of raw materials and components, and in other manufacturing costs;

• fluctuations in levels of channel inventory;

• amount and timing of sales and marketing and other operating expenses related to maintenance and expansion of our business;

• negative publicity about our products;

• adverse litigation judgments, settlements or other litigation-related costs, especially from litigation involving alleged patent infringement or defense of our patents;

• fluctuations in foreign exchange rates;

• changes in tax rates or adverse changes in tax laws that expose us to additional income tax liabilities;

• natural disasters, geopolitical unrest, war, terrorism and other catastrophes outside of our control; and

• general economic conditions in domestic or international markets.

Any one of the factors above or the cumulative effect of some of the factors above may result in significant fluctuations in our operating results. As a result, period-to-period comparisons of our operating results may not be meaningful, and you should not rely on them as an indication of our future performance. The variability and unpredictability of our quarterly operating results or other operating metrics could result in our failure to meet our expectations or those of investors or any analysts that cover us with respect to revenue or other operating results for a particular period. If we fail to meet or exceed such expectations for these or any other reasons, the market price of our common stock could fall substantially.

The success of our business depends on the continued growth of the voice-enabled speaker market, and our ability to establish and maintain market share.

We have increasingly focused our product roadmap on voice-enabled speakers, and we recently introduced our first voice-enabled speaker, Sonos One, in October 2017, and our first voice-enabled home theater speaker,

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Sonos Beam, in July 2018. The voice-enabled speaker market and the voice-enabled smart home systems market are still in the early stages of development. If these markets do not continue to grow, or grow in unpredictable ways, our revenue may fall short of expectations and our operating results may be harmed, particularly since we incur substantial costs to introduce new products in advance of anticipated sales. Additionally, even if the market for voice-enabled speakers does expand, we may not be successful in developing and selling speakers that appeal to consumers or gain sufficient market acceptance. To succeed in this market, we will need to design, produce and sell innovative and compelling products and partner with other businesses that enable us to capitalize on new technologies. We also face intense competition in our markets, and we are dependent on a number of technology partners for the development of our products, some of which have developed or may develop and sell voice-enabled speaker products of their own. For example, Sonos One and Sonos Beam feature voice-control enablement powered by Amazon’s Alexa technology while Amazon currently competes by offering speaker products of their own. As we continue to execute on our product roadmap, our success in introducing voice-enabled speakers enabled with third-party technology, especially voice control, will increasingly depend on the willingness of our technology partners, many of which sell or may develop products that compete with ours, to continue to promote and enhance our products. These technology partners may cease doing business with us or disable the technology they provide our products for a variety of reasons, including to promote their products over our own. If these partners disable the integration of their technology into our products, demand for our products may decrease and our sales may be harmed. We cannot assure you that the resources we invest in research and development, existing or alternative technology partnerships, marketing and sales will be adequate for us to be successful in establishing and maintaining a large share of the voice-enabled speaker market. If we are not able to capture and sustain market share, our future revenue growth will be negatively impacted.

To remain competitive and stimulate consumer demand, we must successfully manage frequent new product introductions and transitions.

Due to the highly volatile and competitive nature of the home audio and broader consumer electronics industry, we must frequently introduce new products, enhance existing products and effectively stimulate customer demand for new and upgraded products in both mature and developing markets. The successful introduction of our new products depends on a number of factors, such as the timely completion of development efforts to correspond with limited windows for market introduction. In recent years, we have experienced delays in bringing new products to market, along with higher-than-expected costs in doing so. We face significant challenges in managing the risks associated with new product introductions and production ramp-up issues, including accurately forecasting initial consumer demand, as well as the risk that new products may have quality or other defects in the early stages of introduction. In addition, new and upgraded products can affect the sales and profitability of existing products. Accordingly, if we cannot properly manage the introduction of our new products, our operating results and financial condition may be adversely impacted, particularly if the cadence of new product introductions increases as we expect.

Our products are manufactured by a single contract manufacturer, and we may be unable to operate our business if our manufacturer is unable to manufacture our products or ends its relationship with us.

We depend on a single manufacturer, Inventec Appliances Corporation, or Inventec, to manufacture our products on a non-exclusive basis. Our reliance on a sole manufacturer increases the risk that, in the event of an interruption in Inventec’s operations, whether due to a natural catastrophe, labor dispute or otherwise, we would not be able to develop an alternate source without incurring material additional costs and substantial delays. Additionally, Inventec can terminate its agreement with us for any reason with 180 days’ advance notice. If Inventec breaches or terminates its agreement with us or otherwise fails to perform its obligations in a timely manner, we may be severely delayed or fully prevented from selling our products. If Inventec were unable to perform its obligations or were to end its relationship with us, it would take up a significant amount of time to identify and onboard a new manufacturer that has the capability and resources to build our products to our specifications in sufficient volume. A violation of labor, environmental, intellectual property or other laws by Inventec, or a failure of Inventec to follow generally accepted ethical business practices, could create negative

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publicity, harm our reputation and require us to contract with a new manufacturer. Identifying a new manufacturer would require us to evaluate and approve their quality control systems, technical capabilities, responsiveness, service, financial stability, regulatory compliance and labor and other ethical practices. Any material disruption in our relationship with Inventec would harm our ability to compete effectively and satisfy demand for our products, and could adversely impact our revenue, gross margin and operating results.

We depend on a limited number of third-party components suppliers and logistics providers. Our business may be harmed if these parties do not perform their obligations or if they suffer interruptions to their own operations, or if alternative component sources are unavailable or if there is an increase in the costs of these components.

We are dependent on a limited number of suppliers for various key components used in our products, and the cost, quality and availability of these components are essential to the successful production and sale of our products. We have sole-source suppliers, particularly for product-specific mechanical enclosures, and single-source suppliers, particularly for processor components. We are subject to the risk of shortages and long lead times in the supply of these components and other materials, and the risk that our suppliers discontinue or modify, or increase the price of, the components used in our products. If the supply of these components were to be delayed or constrained, or if one or more of our main suppliers were to go out of business, alternative sources or suppliers may not be available on acceptable terms or at all. Further, if there were a shortage of supply, the cost of these components may increase and harm our ability to sell our products on a cost-effective basis. For example, similar to other companies in the electronics industries, we have from time to time experienced shortages of random-access memory that is integral to manufacturing our products. More recently, the global supply of multilayer ceramic capacitors, which are components used across the consumer electronics industry as well as in all of our products, is experiencing shortages due to an imbalance of global demand and supply capacity, resulting in related price increases that we expect will negatively impact our gross margin through calender year 2019. In connection with any supply shortages in the future, reliable and cost-effective replacement sources may not be available on short notice or at all, and this may result in decreased sales or force us to increase prices and face a corresponding decrease in demand for our products. In the event that any of our suppliers were to discontinue production of our key product components, developing alternate sources of supply for these components would be time consuming, difficult and costly. This would harm our ability to sell our products in order to meet market demand and could materially and adversely affect our brand, image, business, prospects and operating results.

We use a small number of logistics providers for substantially all of our product delivery to both distributors and retailers. If one of these providers, such as Ingram Micro, Inc., were to experience financial difficulties or disruptions in its business, our own operations could be adversely affected. Because substantially all of our products are distributed from a small number of locations and by a small number of companies, we are susceptible to both isolated and system-wide interruptions caused by events out of our control. Our distribution facilities employ computer-controlled and automated equipment, and thus may be vulnerable to computer viruses or other security risks, as well as to electronic or power interruptions or other system failures. Any disruption to the operations of our distributions facilities could delay product delivery, harm our reputation among our customers and adversely affect our operating results and financial condition.

We have limited control over these parties on which our business depends. If any of these parties fails to perform its obligations on schedule, or breaches or ends its relationship with us, we may be unable to satisfy demand for our products. Delays, product shortages and other problems could impair our retail distribution and brand image and make it difficult for us to attract new customers. If we experience significantly increased demand, or if we need to replace an existing supplier or logistics provider, we may be unable to supplement or replace such supply or logistics capacity on terms that are acceptable to us, which may undermine our ability to deliver our products to customers in a timely manner. Further, we do not have long-term contracts with all of these parties, and there can be no assurance that we will be able to renew our contracts with them on favorable terms or at all. Accordingly, a loss or interruption in the service of any key party could adversely impact our revenue, gross margin and operating results.

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Our investments in marketing may not yield the results we expect.

In recent years, we have significantly expanded our financial commitment to marketing our products. Such efforts include direct marketing to consumers to promote awareness of our products, and of our brand in general. These efforts may not yield the results we anticipate and may prove more expensive than we currently anticipate, and revenue may not increase sufficiently to offset these higher expenses. Failures in our marketing efforts could adversely impact our business, financial condition and results of operations.

The home audio and consumer electronics industries are highly competitive. Competition presents an ongoing threat to the success of our business.

The markets in which we operate are extremely competitive and rapidly evolving, and we expect that competition will intensify in the future. Our competition includes established, well-known sellers of speakers and home sound systems such as Bang & Olufsen, Bose, Samsung (and its subsidiaries Harman Kardon and JBL), Sony and Sound United (and its subsidiaries Denon and Polk), and developers of voice-enabled speakers and systems such as Amazon, Apple and Google. We could also face competition from new market entrants, some of whom might be current partners of ours. In order to deliver products that appeal to changing and increasingly diverse consumer preferences, and to overcome the fact that a relatively high percentage of consumers may already own or use products that they perceive to be similar to those that we offer, we must develop superior technology, anticipate increasingly diverse consumer tastes and rapidly develop attractive products with competitive selling prices. Even if we are able to efficiently develop and offer innovative products at competitive selling prices, our operating results and financial condition may be adversely impacted if we are unable to effectively anticipate and counter the ongoing price erosion that frequently affects consumer products or if the average selling prices of our products decrease faster than we are able to reduce our manufacturing costs.

Most of our competitors have greater financial, technical and marketing resources available to them than those available to us, and, as a result, they may develop competing products that cause the demand for our products to decline. Our current and potential competitors have established, or may establish, cooperative relationships among themselves or with third parties in order to increase the abilities of their products to address the needs of our prospective customers, and other companies may enter our markets by acquiring or entering into strategic relationships with our competitors. To remain competitive, we may also need to increase our selling and marketing expenses. We may not have the financial resources, technical expertise or marketing and sales capabilities to continue to compete successfully. A failure to efficiently anticipate and respond to these established and new competitors may adversely impact our business and operating results.

Further, our current and prospective competitors may consolidate with each other or acquire companies that will allow them to develop products that better compete with our products. Such consolidation would intensify the competition that we face and may also disrupt or lead to termination of our distribution, technology and content partnerships. For example, if one of our content partners were to acquire a home audio hardware company, that partner may decide to disable the streaming functionality of its service with our products. If we are unable to compete with these consolidated companies or if consolidation in the market disrupts our partnerships or reduces the number of companies we partner with, our business would be adversely affected.

Conflicts with our distribution and technology partners could harm our business and operating results.

Several of our existing products compete, and products that we may offer in the future could compete, with the product offerings of some of our significant channel and distribution partners, which partners have greater financial resources than we do. Amazon and Apple, for example, already offer products that compete with ours. To the extent products offered by our partners compete with our products, they may choose to promote their own products over ours, or could end our partnerships and cease selling or promoting our products entirely. If our distribution partners, such as Amazon and Apple, continue to compete with us more directly in the future, they would be able to market and promote their products more prominently than they market and promote our

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products, and could refuse to promote or offer our products for sale alongside their own, or at all, in distribution channels. Any reduction in our ability to place and promote our products, or increased competition for available shelf or website placement, especially during peak retail periods, such as the holiday shopping season, would require us to increase our marketing expenditures and to seek other distribution channels in order to promote our products. If we are unable to effectively sell our products due to conflicts with our distribution partners, our business would be harmed.

We are currently developing voice-enabled speaker systems that are enhanced with the technology of our partners, including those who sell competing products. We introduced Sonos One in October 2017 and Sonos Beam in July 2018, which are both voice-enabled speakers that feature voice-control enablement powered by Amazon’s Alexa technology. Our current agreement with Amazon allows Amazon to disable the Alexa integration in our Sonos One and Sonos Beam products with limited notice. As such, it is possible that Amazon, which sells products that compete with ours, may on limited notice disable the integration, which would cause our Sonos One or Sonos Beam products to lose their voice-enabled functionality. Amazon could also begin charging us for this integration which would harm our operating results. We are working to establish partnerships with other companies that have developed voice-control enablement technology, but we cannot assure you that we will be successful in doing so. If Amazon does not maintain the Alexa integration, if Amazon seeks to charge us for this integration, if we have not developed alternative partnerships for similar voice-enabled products or if we have not developed such products on our own, our sales may decline, our reputation may be harmed and our business and operating results may suffer.

Many of our current and potential partners have business objectives that may drive them to sell their speaker products at a significant discount to ours. Amazon and Google, for example, both currently offer their speaker products at significantly lower prices than Sonos One and Sonos Beam. Many of these partners may subsidize these prices and seek to monetize their customers through the sale of additional services rather than the speakers themselves. Our business model, by contrast, is dependent on the sale of our speakers. Should we be forced to lower the price of our products in order to compete on a price basis, our operating results could be harmed.

Competition with our content partners could cause these partners to cease to allow their content to be streamed on our products, which could lower product demand.

Demand for our products depends in large part on the availability of streaming third-party content that appeals to our existing and prospective customers. Compatibility with streaming music services, podcast platforms and other content provided by our content partners is a key feature of our products. To date, all of our arrangements have been entered into on a royalty-free basis. Some of these content partners compete with us already, and others may in the future produce and sell speakers along with their streaming services. Additionally, other content partners may form stronger alliances with our competitors in the home audio market. Any of our content partners may cease to allow their content to be streamed on our products for a variety of reasons, including to promote other partnerships or their products over our own, or seek to charge us for this streaming. If this were to happen, demand for our products could decrease and our operating results could be harmed.

If we are unable to accurately anticipate market demand for our products, we may have difficulty managing our production and inventory and our operating results could be harmed.

We must forecast production and inventory needs in advance with our suppliers and manufacturer, and our ability to do so accurately could be affected by many factors, including an increase or decrease in customer demand for our products or those of our competitors, the success of new products in the market, sales promotions by us or our competitors, channel inventory levels and unanticipated shifts in general economic conditions or consumer confidence levels. Such a rapid increase in production could also cause a decline in manufacturing quality and customer satisfaction. If demand does not meet our forecast, excess product inventory could force us to write-down or write-off inventory, or to sell the excess inventory at discounted prices, which could cause our gross margin to suffer and could impair the strength of our brand. In addition, if we were to have excess

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inventory, we may have reduced working capital, which could adversely affect our ability to invest in other important areas of our business such as marketing and product development. If our channel partners have excess inventory of our products, they may decrease purchase of our products in subsequent periods. If demand exceeds our forecast and we do not have sufficient inventory to meet this demand, we would have to rapidly increase production and suffer higher supply and manufacturing costs that would lower our gross margin. Any of these scenarios could adversely impact our operating results and financial condition.

We experience seasonal demand for our products, and if our sales in high-demand periods are below our forecasts, our overall financial condition and operating results could be adversely affected.

Given the seasonal nature of our sales, accurate forecasting is critical to our business. Our fiscal year ends on the Saturday closest to September 30, the holiday shopping season occurs in the first quarter of our fiscal year and the typically slower summer months occur in our fourth fiscal quarter. Historically, our revenue has been significantly higher in our first fiscal quarter due to increased consumer spending patterns during the holiday season. We attempt to time our new product releases to coincide with relatively higher consumer spending in the first fiscal quarter, which contributes to this seasonal variation. Any shortfalls in expected first quarter revenue, due to macroeconomic conditions, product release patterns, a decline in the effectiveness of our promotional activities, supply chain disruptions or for any other reason, could cause our annual operating results to suffer significantly. In addition, if we fail to accurately forecast customer demand for the holiday season, we may experience excess inventory levels or a shortage of products available for sale, which could further harm our financial condition and operating results.

If market demand for streaming music does not grow as anticipated or the availability and quality of streaming services does not continue to increase, our business could be adversely affected.

A large proportion of our customer base uses our products to listen to content via subscription-based streaming music services. Accordingly, we believe our future revenue growth will depend in significant part on the continued expansion of the market for streaming music. We cannot assure you that this market will continue to grow. The success of the streaming music market depends on the quality, reliability and adoption of streaming technology, and on the continued success of streaming music services such as Apple Music, Pandora, Spotify and TuneIn. In order to attract and retain customers, these services must continue to attract record labels, artists, other content providers and advertisers and all parties must be able to successfully monetize their streaming-based businesses over the long term. If the development of the streaming music market fails to keep pace with consumer demand expectations, the market for streaming music could decline and our business may be harmed. Additionally, we cannot assure you that the streaming music business model or the streaming music services we partner with will be successful over the long term. If the streaming music market in general declines or if the streaming services we partner with are not successful, demand for our products may suffer and our operating results may be adversely affected.

If we are not successful in expanding our direct-to-consumer sales channel by driving consumer traffic and consumer purchases through our website, our business and results of operations could be harmed.

We are currently investing in our direct-to-consumer sales channel, primarily through our website, and our future growth relies in part on our ability to attract consumers to this channel. While sales on our website sonos.com represented 10% of our revenue in fiscal 2017 and 12% in the six months ended March 31, 2018, we plan to invest in driving sales through this channel. The level of consumer traffic and volume of consumer purchases through our website depends in large part on our ability to provide a user-friendly and visually appealing interface, a seamless consumer experience, sufficient inventory and reliable, timely delivery of our products. Building this channel and improving our website and product delivery services will continue to require significant expenditures in marketing, software development and infrastructure. If we are unable to drive traffic to, and increase sales through, our website, our business and results of operations could be harmed. The success of direct-to-consumer sales through our website is subject to risks associated with e-commerce, including

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implementing and maintaining appropriate technology and systems, reliance on third-party service providers, data breaches and disruption of internet service. Our inability to adequately respond to these risks and uncertainties or to successfully maintain and expand our direct-to-consumer business via our website may have an adverse impact on our results of operations.

Additionally, the expansion of our direct-to-consumer channel may alienate some of our channel partners and could cause a reduction in product sales from these partners. Channel partners may perceive themselves to be at a disadvantage based on the direct-to-consumer sales offered through our website. Due to these and other factors, conflicts in our sales channels could arise and cause channel partners to divert resources away from the promotion and sale of our products or to offer competitive products. Further, to the extent we use our mobile app to increase traffic to our website and increase direct-to-consumer sales, we will rely on application marketplaces such as the Apple App Store and Google Play to drive downloads of our mobile app. Apple and Google, both of which sell products that compete with ours, may choose to use their marketplaces to promote their competing products over ours or may make access to our app more difficult. Any of these situations could adversely impact our business and results of operations.

We sell our products through a limited number of key channel partners, and the loss of any such channel partner would adversely impact our business.

We are dependent on our channel partners for a vast majority of our product sales. Some of our key channel partners include Best Buy, which accounted for 16% of our revenue in fiscal 2017 and 17% of our revenue in the six months ended March 31, 2018, and the ALSO Group, our distributor in Germany, Sweden, Denmark and Norway, which accounted for 12% of our revenue in fiscal 2017 and in the six months ended March 31, 2018. We do not enter into long-term volume commitments with our major channel partners. If one or several of our channel partners were to discontinue selling our products, increase their promotion of competing products or choose to promote competing products over ours, the volume of our products sold to customers could decrease, which could in turn harm our business. In addition, the loss of a key channel partner for distribution would require us to identify and contract with alternative channel partners, or to rely more heavily on direct-to-consumer sales, which we may be unable to do successfully or which could prove time-consuming and expensive. In addition, revenue from our channel partners depends on a number of factors outside our control and may vary from period to period. If one or more of our channel partners were to experience serious financial difficulty as a result of weak economic conditions or otherwise, and were to reduce its inventory of our products or limit or cease operations, our business and results of operations would be significantly harmed. Consolidation of our channel partners in the future or additional concentration of market share among our channel partners may also exacerbate this risk.

Because we compete with many other providers of consumer products for placement and promotion of products in the stores of our channel partners, our success depends on our channel partners and their willingness to promote our products successfully. In general, our contracts with these third parties allow them to exercise significant discretion over the placement and promotion of our products in their stores, and they could give higher priority to other products. Our channel partners may also give their own products or those of our competitors better placement over our products in stores or online. If our channel partners do not effectively market and sell our products, or if they choose to use greater efforts to market and sell their own or our competitors’ products, our business, operating results and prospects may be adversely affected.

A significant disruption in our websites, servers or information technology systems, or those of our third-party partners, or flaws or other vulnerabilities in our products, could impair our customers’ listening experience or otherwise adversely affect our customers, damage our reputation and harm our business.

As a consumer electronics company, our website and mobile app are important presentations of our business, identity and brand, and an important means of interacting with, and providing information to, consumers of our products. We depend on our servers and centralized information technology systems, and those of third parties, for product functionality and to store intellectual property, forecast our business, maintain

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financial records, manage operations and inventory and operate other critical functions. Accordingly, we rely heavily on the accuracy, capacity and security of both our information technology systems and those of third parties. We allocate significant resources to maintaining our information technology systems and deploying network security, data encryption, training and other measures to protect against unauthorized access or misuse. Nevertheless, our websites and information technology systems, and those of the third parties we rely on, are susceptible to damage, disruptions or shutdowns due to power outages, hardware failures, structural or operational failures, computer viruses, hacking attacks, telecommunication failures, user error, malfeasance, system upgrades, integration or migration, and other foreseeable and unforeseeable events. All of our products are connected to the internet and receive periodic software updates from our servers and it is possible that such servers could be compromised, resulting in the delivery of malicious code, severely hampering product functionality. System failures and disruptions could impede the manufacturing and shipping of products, delivery of online services, functionality of our products, transactions processing and financial reporting, and could result in the loss of intellectual property or data, require substantial repair costs and damage our reputation and business relationships. Such failures and disruptions could therefore adversely affect our reputation, competitive position, financial condition and results of operations.

For example, we use Amazon Web Services, or AWS, to maintain the interconnectivity of our mobile app to our servers and those of the streaming services that our customers access to enjoy our products. Our brand, reputation and ability to retain and attract new customers depend on the reliable performance of our technology and cloud-based content delivery. Because AWS runs its own platform that we access, we are vulnerable to both system-wide and Sonos-specific service outages at AWS. Our access to AWS’ infrastructure could be limited by a number of potential causes, including technical failures, natural disasters, fraud or security attacks that we cannot predict or prevent. If we were to experience an AWS service interruption, or if the security of the AWS infrastructure were compromised or believed to have been compromised, our ability to serve our customers and our reputation with current and potential customers would be negatively impacted.

Additionally, our products may contain flaws that make them susceptible to unauthorized access or use. For example, we recently discovered a vulnerability in our products that may be exploited when a customer visits a website with malicious content, allowing the customer’s local network to be accessed by third parties who can then gain unauthorized access to the customer’s playlists and other data and limited control of the customer’s devices. While we devote significant resources to address and eliminate flaws and other vulnerabilities in our products, there can be no assurance that our products will not be compromised in the future. Any such flaws or vulnerabilities, whether actual or merely potential, could harm our reputation, competitive position, financial condition and results of operations.

Changes in how network operators manage data that travel across their networks or in net neutrality rules could harm our business.

Our business relies in part upon the ability of consumers to access high-quality streaming content through the internet. As a result, the growth of our business depends partially on our customers’ ability to obtain low-cost, high-speed internet access, which relies in part on network operators’ continued willingness to upgrade and maintain their equipment as needed to sustain a robust internet infrastructure, as well as their continued willingness to preserve the open and interconnected nature of the internet. We exercise no control over network operators, which makes us vulnerable to any errors, interruptions or delays in their operations. Any material disruption in internet services could harm our business.

To the extent that the number of internet users continues to increase, network congestion could adversely affect the reliability of our platform. We may also face increased costs of doing business if network operators engage in discriminatory practices with respect to streamed audio content in an effort to monetize access to their networks by content providers. In the past, internet service providers, or ISPs, have attempted to implement usage-based pricing, bandwidth caps and traffic shaping or throttling. To the extent network operators create tiers of internet access service and charge our customers in direct relation to their consumption of audio content, our ability to attract and retain customers could be impaired, which would harm our business.

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On December 14, 2017, the Federal Communications Commission announced that it was repealing the net neutrality rules adopted in 2015. Net neutrality rules were designed to ensure that all online content is treated the same by ISPs and other companies that provide broadband services. The repeal of the net neutrality rules could force us to incur greater operating expenses, cause our streaming partners to seek to shift costs to us or result in a decrease in the streaming-based usage of our platform by our customers, any of which would harm our results of operations.

Our investments in research and development may not yield the results expected.

Our business operates in intensely competitive markets characterized by changing consumer preferences and rapid technological innovation. Due to advanced technological innovation and the relative ease of technology imitation, new products tend to become standardized more rapidly, leading to more intense competition and ongoing price erosion. In order to strengthen the competitiveness of our products in this environment, we continue to invest heavily in research and development. However, these investments may not yield the innovation or the results expected on a timely basis, or our competitors may surpass us in technological innovation, hindering our ability to timely commercialize new and competitive products that meet the needs and demands of the market, which consequently may adversely impact our operating results as well as our reputation.

If we are not able to maintain and enhance the value and reputation of our brand, or if our reputation is otherwise harmed, our business and operating results could be adversely affected.

Our continued success depends on our reputation for providing high-quality products and consumer experiences, and the “Sonos” name is critical to preserving and expanding our business. Maintaining, promoting and positioning our brand depends largely on the success of our marketing efforts, the consistency of the quality of our products and our ability to successfully secure, maintain and defend the trademarks that are key to our brand. Each of these objectives requires significant expenditures, and there is no guarantee that we will be able to achieve these objectives successfully. If we fail to successfully maintain, promote and position our brand and protect our reputation, or if we incur significant expenses in this effort, our business, financial condition and operating results may be adversely affected. The value of our brand could also be severely damaged by isolated incidents, particularly if these incidents receive considerable negative publicity or result in litigation, and by events outside of our control. Additionally, in the United States, we rely on custom installers of home audio systems for a significant portion of our sales but maintain no control over the quality of their work and thus could suffer damage to our brand or business to the extent such installations are unsatisfactory or defective. The market demand for our products, the value of our brand and our reputation generally could be harmed if any such incidents or other matters erode consumer confidence in us or our products. Any negative effect on our brand, regardless of whether it is within our control, could adversely affect our reputation, business and results of operations.

Our efforts to expand beyond our core product offerings and into adjacent markets in the consumer electronics industry may not succeed and could adversely impact our business.

We may seek to expand beyond our core home sound systems and develop products that have wider applications in everyday life, such as commercial or office. Expanding into new markets would require us to devote substantial additional resources, and our ability to succeed in developing such products to address such markets is unproven. It is likely that we would need to hire additional personnel, partner with new third parties and incur considerable research and development expenses in order to pursue such an expansion successfully. We have less familiarity with consumer preferences in such markets and less product or category knowledge, and we could encounter difficulties in attracting new customers due to lower levels of consumer familiarity with our brand. As a result, we may not be successful in future efforts to achieve profitability from new markets or new types of products, and our ability to generate revenue from our existing products may suffer. If any such expansion does not enhance our ability to maintain or grow our revenue or recover any associated development costs, our operating results could be adversely affected.

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We may choose to discontinue support for older versions of our products, resulting in customer dissatisfaction that could negatively affect our business and operating results.

We have historically maintained, and we believe our customers have grown to expect, extensive backward compatibility for our older products and the software that supports them, allowing older products to continue to benefit from new software updates. We expect that in the near to intermediate term, this backward compatibility will no longer be practical or cost-effective, and we may decrease or discontinue service for our older products. Therefore, if we no longer provide extensive backward capability for our products, we may damage our relationship with our customers, and the value proposition of our products with existing and prospective customers may decline. We may lose existing customers if their older products cannot integrate with newer versions of our software, and this may also result in negative publicity that could adversely affect our reputation and brand loyalty and impact our ability to attract new customers or sell new products to existing customers. For these reasons, any decision to decrease or discontinue backward capability may decrease sales and adversely affect our business, operating results and financial condition.

Product quality issues and a higher-than-expected number of warranty claims or returns could harm our business and operating results.

The products that we sell could contain defects in design or manufacture. Defects could also occur in the products or components that are supplied to us. There can be no assurance we will be able to detect and remedy all defects in the hardware and software we sell, which could result in product recalls, product redesign efforts, loss of revenue, reputational damage and significant warranty and other remediation expenses. Similar to other consumer electronics, our products have a risk of overheating and fire in the course of usage or upon malfunction. Any such defect could result in harm to property or in personal injury. If we determine that a product does not meet product quality standards or may contain a defect, the launch of such product could be delayed until we remedy the quality issue or defect. The costs associated with any protracted delay necessary to remedy a quality issue or defect in a new product could be substantial.

We generally provide a one-year warranty on all of our products, except in the European Union, or the EU, and select other countries where we provide a two-year warranty on all of our products. The occurrence of any material defects in our products could expose us to liability for damages and warranty claims in excess of our current reserves, and we could incur significant costs to correct any defects, warranty claims or other problems. In addition, if any of our product designs are defective or are alleged to be defective, we may be required to participate in a recall campaign. In part due to the terms of our warranty policy, any failure rate of our products that exceeds our expectations may result in unanticipated losses. Any negative publicity related to the perceived quality of our products could affect our brand image and decrease retailer, distributor and consumer confidence and demand, which could adversely affect our operating results and financial condition. Further, accidental damage coverage and extended warranties are regulated in the United States at the state level and are treated differently within each state. Additionally, outside the United States, regulations for extended warranties and accidental damage vary from country to country. Changes in interpretation of the regulations concerning extended warranties and accidental damage coverage on a federal, state, local or international level may cause us to incur costs or have additional regulatory requirements to meet in the future in order to continue to offer our support services. Our failure to comply with past, present and future similar laws could result in reduced sales of our products, reputational damage, penalties and other sanctions, which could harm our business and financial condition.

The loss of one or more of our key personnel, or our failure to attract, assimilate and retain other highly qualified personnel in the future, could harm our business.

We depend on the continued services and performance of our key personnel. The loss of key personnel, including key members of management as well as our product development, marketing, sales and technology personnel, could disrupt our operations and have an adverse effect on our ability to grow our business. In addition, the loss of key personnel in our finance and accounting departments could harm our internal controls, financial reporting capability and capacity to forecast and plan for future growth.

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As we become a more mature company, we may find our recruiting efforts more challenging. In particular, we have experienced difficulties in recruiting qualified software engineers. The equity incentives we currently use to attract, retain and motivate employees may not be as effective as in the past. In particular, we rely heavily on equity incentives to attract and retain employees, and if the value of the underlying common stock does not grow commensurate with expectations, we may not be able to effectively recruit new employees and we may risk losing existing employees. If we do not succeed in attracting, hiring and integrating high-quality personnel, or in retaining and motivating existing personnel, we may be unable to grow effectively and our financial condition may be harmed.

We may be subject to intellectual property rights claims and other litigation which are expensive to support, and if resolved adversely, could have a significant impact on us and our stockholders.

Companies in the consumer electronics industries own large numbers of patents, copyrights, trademarks, domain names and trade secrets, and frequently enter into litigation based on allegations of infringement, misappropriation or other violations of intellectual property or other rights. As we gain an increasingly high profile and face more intense competition in our markets, the possibility of intellectual property rights claims against us grows, including the threat of lawsuits from non-practicing entities seeking to undermine our intellectual property rights. Our technologies may not be able to withstand any third-party claims or rights against their use, and we may be subject to litigation and disputes. The costs of supporting such litigation and disputes is considerable, and there can be no assurance that a favorable outcome would be obtained. We may be required to settle such litigations and disputes on terms that are unfavorable to us. Similarly, if any litigation to which we may be party fails to settle and we go to trial, we may be subject to an unfavorable judgment that may not be reversible upon appeal. The terms of such a settlement or judgment may require us to cease some or all of our operations, limit our ability to use certain technologies, pay substantial amounts to the other party or issue additional shares of our capital stock to the other party, which would dilute our existing stockholders.

With respect to intellectual property rights claims, we may have to negotiate a license in order to continue practices found to be in violation of a third party’s rights. Any such license may not be available on reasonable terms and may significantly increase our operating expenses, or may not be available to us at all. As a result, we may also be required to develop alternative, non-infringing technology or practices or to discontinue the practices altogether. The development of alternative non-infringing technology or practices could require significant effort and expense and ultimately may not be successful, and our business and results of operations could be materially and adversely affected.

If we are unable to protect our intellectual property, the value of our brand and other intangible assets may be diminished, and our business may be adversely affected.

We rely and expect to continue to rely on a combination of confidentiality and license agreements with our employees, consultants and third parties with whom we have relationships, as well as patent, trademark, copyright and trade secret protection laws, to protect our proprietary rights. In the United States and certain other countries, we have filed various applications for certain aspects of our intellectual property, most notably patents. However, third parties may knowingly or unknowingly infringe our proprietary rights, third parties may challenge our proprietary rights, pending and future patent and trademark applications may not be approved and we may not be able to prevent infringement without incurring substantial expense. Such infringement could have a material adverse effect on our brand, business, financial condition and results of operations. We have initiated legal proceedings to protect our intellectual property rights, and we may file additional actions in the future. For example, we were involved in litigation with D&M Holdings Inc. d/b/a The D+M Group, D&M Holdings U.S. Inc. and Denon Electronics (USA), LLC, or, collectively, Denon. In December 2017, we obtained a successful jury verdict that Denon has infringed and is infringing certain of our patents. We continued to litigate over the remaining patents-in-suit, as well as a countersuit that Denon had brought against us, and in May 2018, we settled this litigation in exchange for royalty payments from Denon. The cost of defending our intellectual property has been and may be substantial, and there is no assurance we will be successful. Additionally, our

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business could be adversely affected as a result of any such actions, or a finding that any patents-in-suit are invalid or unenforceable. These actions have led and may also lead to additional counterclaims against us, which are expensive to defend against and for which there can be no assurance of a favorable outcome.

The regulations of certain foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States. As our brand grows, we will likely discover unauthorized products in the marketplace that are counterfeit reproductions of our products. Although we may expend efforts to pursue counterfeiters, it is not practical to pursue all counterfeiters. If we are unsuccessful in pursuing producers or sellers of counterfeit products, continued sales of these products could adversely impact our brand, business, financial condition and results of operations.

Our use of open source software could negatively affect our ability to sell our products and could subject us to possible litigation.

We incorporate open source software into our products, and we may continue to incorporate open source software into our products in the future. Open source software is generally licensed by its authors or other third parties under open source licenses. Some of these licenses contain requirements that we make available source code for modifications or derivative works we create based upon the open source software, and that we license such modifications or derivative works under the terms of a particular open source license or other license granting third parties certain rights of further use. Additionally, if a third-party software provider has incorporated open source software into software that we license from such provider, we could be required to disclose any of our source code that incorporates or is a modification of our licensed software. If an author or other third party that distributes open source software that we use or license were to allege that we had not complied with the conditions of the applicable license, we could be required to incur significant legal expenses defending against those allegations and could be subject to significant damages, enjoined from offering or selling our products that contained the open source software and required to comply with the foregoing conditions. Any of the foregoing could disrupt and harm our business and financial condition.

We collect, store, process and use our customers’ personally identifiable information and other data, which subjects us to governmental regulation and other legal obligations related to privacy, information security and data protection. Any cybersecurity breaches or our actual or perceived failure to comply with such legal obligations by us, or by our third-party service providers or partners, could harm our business.

We collect, store, process and use our customers’ personally identifiable information and other data, and we rely on third parties that are not directly under our control to do so as well. While we take measures intended to protect the security, integrity and confidentiality of the personal information and other sensitive information we collect, store or transmit, we cannot guarantee that inadvertent or unauthorized use or disclosure will not occur, or that third parties will not gain unauthorized access to this information. There have been a number of recent reported incidents where third parties have used software to access the personal data of their partners’ customers for marketing and other purposes. While our privacy policies currently prohibit such activities, our third-party service providers or partners may engage in such activity without our knowledge or consent. If we or our third-party service providers were to experience a breach, disruption or failure of systems compromising our customers’ data, or if one of our third-party service providers or partners were to access our customers’ personal data without our authorization, our brand and reputation could be adversely affected, use of our products could decrease and we could be exposed to a risk of loss, litigation and regulatory proceedings. Depending on the nature of the information compromised in a data breach, disruption or other unauthorized access to our customers’ data, we may also have obligations to notify customers about the incident and we may need to provide some form of remedy for the individuals affected. Such breach notification laws continue to develop and may be inconsistent across jurisdictions. Complying with these obligations could cause us to incur substantial costs and negative publicity. While we maintain insurance coverage that is designed to address certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses or all types of claims that may arise in the event we experience a security breach.

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Data protection laws may be interpreted and applied inconsistently from country to country, and often impose requirements that are inconsistent with one another. In addition, because various jurisdictions have different laws and regulations concerning the use, storage and transmission of such information, we may face complex and varied compliance requirements in existing markets as well as in new international markets that we seek to enter. Such laws and regulations, and the variation between jurisdictions, could subject us to elevated costs of security measures, liabilities or negative publicity that could adversely affect our business.

Regulatory scrutiny of privacy, data collection, use of data and data protection is intensifying globally, and the personal information and other data we collect, store, process and use is increasingly subject to legislation and regulations in numerous jurisdictions around the world, especially in Europe. These laws often develop in ways we cannot predict and may materially increase our cost of doing business, particularly as we expand the nature and types of products we offer. For example, the European Parliament has adopted the General Data Protection Regulation, or the GDPR, which came into effect in May 2018 and supersedes prior EU data protection legislation, imposes more stringent EU data protection requirements and provides for greater penalties for noncompliance. Further, following the decision by referendum in June 2016 to withdraw the United Kingdom from the EU, the United Kingdom has initiated the formal process to leave the EU, creating uncertainty with regard to the regulation of data protection in the United Kingdom. In particular, it is unclear whether the United Kingdom will enact data protection laws or regulations designed to be consistent with the pending GDPR and how data transfers to and from the United Kingdom will be regulated. Additionally, although we are making use of the EU Standard Contractual Clauses with regard to the transfer of certain personal data to countries outside the European Economic Area, or the EEA, some regulatory uncertainty remains surrounding the future of data transfers from the EEA to the United States. Although we are closely monitoring regulatory developments in this area, any actual or perceived failure by us to comply with any regulatory requirements or orders or other domestic or international privacy or consumer protection-related laws and regulations could result in proceedings or actions against us by governmental entities or others (e.g. class action litigation), subject us to significant penalties and negative publicity, require us to change our business practices, increase our costs and adversely affect our business.

In addition, we may be or become subject to data localization laws mandating that data collected in a foreign country be processed and stored only within that country. Russia adopted such a law in 2014, and it is expected that China will do so as well. If China or another country in which we have customers were to adopt a data localization law, we could be required to expand our data storage facilities there or build new ones in order to comply. The expenditure this would require, as well as costs of compliance generally, could harm our financial condition.

Our international operations are subject to increased business and economic risks that could impact our financial results.

We have operations outside the United States, and we expect to continue to expand our international presence, especially in Asia. In fiscal 2017, 55% of our revenue was generated outside the United States. This subjects us to a variety of risks inherent in doing business internationally, including:

• fluctuations in currency exchange rates;

• political, social and/or economic instability;

• risks related to governmental regulations in foreign jurisdictions and unexpected changes in regulatory requirements and enforcement;

• higher levels of credit risk and payment fraud;

• burdens of complying with a variety of foreign laws;

• the cost of developing connected products for countries where Wi-Fi technology has been passed over in favor of more advanced cellular data networks;

• tariffs, trade barriers and duties;

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• reduced protection for intellectual property rights in some countries;

• difficulties in staffing and managing global operations and the increased travel, infrastructure and legal compliance costs associated due to having multiple international locations;

• compliance with statutory equity requirements;

• management of tax consequences;

• protectionist laws and business practices that favor local businesses in some countries;

• imposition of currency exchange controls;

• greater fluctuations in sales to customers in developing countries, including longer payment cycles and greater difficulty collecting accounts receivable; and

• delays from customs brokers or government agencies.

If we are unable to manage the complexity of our global operations successfully, or if the risks above become substantial for us, our financial performance and operating results could suffer. These factors may harm our results of operations. Also, any measures that we may implement to reduce risks of our international operations may not be effective, may increase our expenses and may require significant management time and effort. Entry into new international markets requires considerable management time and financial resources related to market, personnel and facilities development before any significant revenue is generated. As a result, initial operations in a new market may operate at low margins or may be unprofitable.

In particular, we have significant operations in China, where many of the risks listed above are particularly acute. Our business, financial condition and results of operations may be materially adversely affected by economic, political, legal, regulatory, competitive and other factors in China. The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement and control over economic growth. In addition, our operations in China are governed by Chinese laws, rules and regulations, some of which are relatively new. The Chinese legal system continues to rapidly evolve, which may result in uncertainties with respect to the interpretation and enforcement of Chinese laws, rules and regulations that could have a material adverse effect on our business. China also experiences high turnover of direct labor due to the intensely competitive and fluid market for labor, and the retention of adequate labor may be a challenge for our operations in China. If our labor turnover rates are higher than we expect, or we otherwise fail to adequately manage our labor needs, then our business and results of operations could be adversely affected.

If significant tariffs or other restrictions are placed on Chinese imports or any related counter-measures are taken by China, our revenue and results of operations may be materially harmed.

If significant tariffs or other restrictions are placed on Chinese imports or any related counter-measures are taken by China, our revenue and results of operations may be materially harmed. The Trump Administration has signaled that it may alter trade agreements and terms between China and the United States, including limiting trade with China and/or imposing a tariff on imports from China. In March 2018, President Trump imposed a 25% tariff on steel imports and a 10% tariff on aluminum imports and announced additional tariffs on goods imported from China specifically, as well as certain other countries. The materials subject to these tariffs to date do not impact our raw material costs. However, if further tariffs are imposed on a broader range of imports, or if further retaliatory trade measures are taken by China or other countries in response to additional tariffs, we may be required to raise our prices, which may result in the loss of customers and harm our reputation and operating performance.

We are susceptible to fluctuations in foreign currency exchange rates, which could result in declines in our reported revenue and operating results.

Our exposure to the effects of fluctuations in foreign currency exchange rates has grown with the continued expansion of our overseas operations, and primarily relates to non-U.S. dollar denominated sales and operating

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expenses worldwide. Unfavorable movement in currency exchange rates will adversely affect our results of operations and financial condition. While a significant percentage of our revenue is denominated in foreign currencies, the majority of our costs are denominated in U.S. dollars. This means that a strengthening of the U.S. dollar would adversely impact our reported financial results. The strengthening of foreign currencies may also increase our cost of product components denominated in those currencies, thus adversely affecting gross margin. Fluctuations in currency exchange rates may also make it more difficult to detect underlying trends in our business and results of operations. We may in the future engage in some hedging activities, such as the use of foreign currency forward and option contracts, to limit the risk of fluctuations in currency exchange rates. However, the use of such hedging activities may not offset any, or more than a portion, of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments. In addition, a strengthening of the U.S. dollar may increase the cost of our products to our customers outside of the United States, which may also adversely affect our financial condition and results of operations.

Natural disasters, geopolitical unrest, war, terrorism, public health issues or other catastrophic events could disrupt the supply, delivery or demand of products, which could negatively affect our operations and performance.

We are subject to the risk of disruption by earthquakes, floods and other natural disasters, fire, power shortages, geopolitical unrest, war, terrorist attacks and other hostile acts, public health issues, epidemics or pandemics and other events beyond our control and the control of the third parties on which we depend. Any of these catastrophic events, whether in the United States or abroad, may have a strong negative impact on the global economy, us, our contract manufacturer or our suppliers or customers, and could decrease demand for our products, create delays and inefficiencies in our supply chain and make it difficult or impossible for us to deliver products to our customers. Further, our headquarters are located in Santa Barbara, California, in a seismically active region that is also prone to forest fires. Any catastrophic event that occurred near our headquarters, or near our manufacturing facilities in China, could impose significant damage to our ability to conduct our business and could require substantial recovery time, which could have an adverse effect on our business, operating results and financial condition.

We must comply with extensive regulatory requirements, and the cost of such compliance, and any failure to comply, may adversely affect our business, financial condition and results of operations.

In our current business and as we expand into new markets and product categories, we must comply with a wide variety of laws, regulations, standards and other requirements governing, among other things, electrical safety, wireless emissions, health and safety, e-commerce, consumer protection, export and import requirements, hazardous materials usage, product-related energy consumption, packaging, recycling and environmental matters. Compliance with these laws, regulations, standards and other requirements may be onerous and expensive, and they may be inconsistent from jurisdiction to jurisdiction, further increasing the cost of compliance and doing business. Our products may require regulatory approvals or satisfaction of other regulatory concerns in the various jurisdictions in which they are manufactured, sold or both. These requirements create procurement and design challenges that require us to incur additional costs identifying suppliers and manufacturers who can obtain and produce compliant materials, parts and products. Failure to comply with such requirements can subject us to liability, additional costs and reputational harm and, in extreme cases, force us to recall products or prevent us from selling our products in certain jurisdictions. If there is a new regulation, or change to an existing regulation, that significantly increases our costs of manufacturing or causes us to significantly alter the way that we manufacture our products, this would have a material adverse effect on our business, financial condition and results of operations. Additionally, while we have implemented policies and procedures designed to ensure compliance with applicable laws and regulations, there can be no assurance that our employees, contractors and agents will not violate such laws and regulations or our policies and procedures.

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We are subject to the Foreign Corrupt Practices Act, or the FCPA, and our failure to comply with the laws and regulations there under could result in penalties which could harm our reputation, business and financial condition.

Due to our international operations, we are subject to the FCPA, which generally prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business. The FCPA also requires companies to maintain adequate recordkeeping and internal accounting practices to accurately reflect our transactions. Under the FCPA, U.S. companies may be held liable for actions taken by their strategic or local partners or representatives. The FCPA and similar laws in other countries can impose civil and criminal penalties for violations. If we do not properly implement practices and controls with respect to compliance with the FCPA and similar laws, or if we fail to enforce those practices and controls properly, we may be subject to regulatory sanctions, including administrative costs related to governmental and internal investigations, civil and criminal penalties, injunctions and restrictions on our business activities, all of which could harm our reputation, business and financial condition.

Our corporate tax rate may increase, we may incur additional income tax liabilities and we may incur costs in complying with changing tax laws in the United States and abroad, which could adversely impact our cash flow, financial condition and results of operations.

We are a U.S.-based company subject to taxes in multiple U.S. and foreign tax jurisdictions. Our profits, cash flow and effective tax rate could be adversely affected by changes in the tax rules and regulations in the jurisdictions in which we do business, unanticipated changes in statutory tax rates and changes to our global mix of earnings. As we expand our operations, any changes in the U.S. or foreign taxation of such operations may increase our worldwide effective tax rate. On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, or the Tax Act, implementing a wide variety of changes to the U.S. tax system. Among other changes at the corporate level, the Tax Act includes (i) a reduction in the U.S. federal corporate income tax rate from 35% to 21%, (ii) further limitations on the deductibility of interest expense and certain executive compensation, (iii) the repeal of the corporate alternative minimum tax, (iv) the imposition of a territorial tax system with a one-time repatriation tax on deemed repatriated earnings of foreign subsidiaries and (v) a subjecting of certain foreign earnings to U.S. taxation through a base erosion anti-abuse tax, or a BEAT, and a new tax related to global intangible low taxed income, or GILTI. Additionally, certain foreign derived intangible income, or FDII, may prospectively be subject to a reduced rate of income tax from the statutorily enacted rate of 21%. Several of the new provisions of the Tax Act require clarification and guidance from the Internal Revenue Service, or the IRS, and the Treasury Department. These or other changes in U.S. tax law could impact our profits, cash flow and effective tax rate.

We are also subject to examination by the IRS and other tax authorities, including state revenue agencies and foreign governments. If any tax authority disagrees with any position we have taken, our tax liabilities and operating results may be adversely affected. While we regularly assess the likelihood of favorable or unfavorable outcomes resulting from examinations by the IRS and other tax authorities to determine the adequacy of our provision for income taxes, there can be no assurance that the actual outcome resulting from these examinations will not materially adversely affect our financial condition and results of operations. In addition, the distribution of our products subjects us to numerous complex and often-changing customs regulations. Failure to comply with these systems and regulations could result in the assessment of additional taxes, duties, interest and penalties. While we believe we are in compliance with local laws, there is no assurance that tax and customs authorities agree with our reporting positions and upon audit may assess us additional taxes, duties, interest and penalties. If this occurs and we cannot successfully defend our position, our profitability will be reduced.

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

As of September 30, 2017, we had gross U.S. federal net operating loss carryforwards of $141.8 million, which expire beginning in 2026, and gross state net operating loss carryforwards of $75.3 million, which expire

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beginning in 2020, as well as $4.1 million in foreign net operating loss carryforwards, which have an indefinite life. Also as of September 30, 2017, we had U.S. federal and state research and development tax credit carryforwards of $18.8 million and $15.7 million. The federal research credits will begin to expire in the year 2025, and the state research credits will begin to expire in 2024. It is possible that we will not generate taxable income in time to use our net operating loss carryforwards before their expiration or at all. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change attributes, such as research tax credits, to offset its post-change income may be limited. In general, an “ownership change” will occur if there is a cumulative change in our ownership by “5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. We last completed a study in 2015 to determine whether an ownership change had occurred under Section 382 or 383 of the Code, and we determined at that time that an ownership change may have occurred in 2012. As a result, our net operating losses generated through July 18, 2012 may be subject to limitation under Section 382 of the Code. The amount of pre-change loss carryforward which may be subject to this limitation is $46.8 million. Our ability to use net operating loss carry forwards and other tax attributes to reduce future taxable income and liabilities may be subject to limitations based on the ownership change of 2012, possible changes since that time or as a result of this offering. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards or other pre-change tax attributes to offset United States federal and state taxable income may still be subject to limitations, which could potentially result in increased future tax liability to us.

We may need additional capital, and we cannot be certain that additional financing will be available.

Our operations have been financed primarily through cash flow from operating activities, borrowings under our credit facilities and net proceeds from the sale of our equity securities. We may require additional equity or debt financing to fund our operations and capital expenditures. Our ability to obtain financing will depend, among other things, on our development efforts, business plans, operating performance and condition of the capital markets at the time we seek financing. We cannot assure you that additional financing will be available to us on favorable terms if and when required, or at all.

We may acquire other businesses or receive offers to be acquired, which could require significant management attention, disrupt our business, dilute stockholder value and adversely affect our operating results.

As part of our business strategy, we may make investments in complementary businesses, products, services or technologies. We have not made any material acquisitions to date and, as a result, our ability as an organization to successfully acquire and integrate other companies, products, services or technologies is unproven. We may not be able to find suitable acquisition candidates and we may not be able to complete acquisitions on favorable terms, if at all. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, and any acquisitions we complete could be viewed negatively by customers or investors. In addition, if we fail to integrate successfully such acquisitions, or the technologies associated with such acquisitions, into our company, the revenue and operating results of the combined company could be adversely affected. Any integration process will require significant time and resources, and we may not be able to manage the process successfully. We may not successfully evaluate or utilize the acquired technology and accurately forecast the financial impact of an acquisition transaction, including accounting charges. We may have to pay cash, incur debt or issue equity securities to pay for any such acquisition, each of which could affect our financial condition or the value of our capital stock. The sale of equity or issuance of debt to finance any such acquisitions could result in dilution to our stockholders. The incurrence of indebtedness would result in increased fixed obligations and could also include covenants or other restrictions that would impede our ability to manage our operations. Additionally, we may receive indications of interest from other parties interested in acquiring some or all of our business. The time required to evaluate such indications of interest could require significant attention from management, disrupt the ordinary functioning of our business and adversely affect our operating results.

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We will need to improve our financial and operational systems in order to manage our growth effectively and support our increasingly complex business arrangements, and an inability to do so could harm our business and results of operations.

To manage our growth and our increasingly complex business operations, especially as we move into new markets internationally, we will need to upgrade our operational and financial systems and procedures, improve the coordination between our various corporate functions and expand, train and manage our workforce adequately. Our efforts to manage the expansion of our operations may place a significant strain on our management personnel, systems and resources, particularly given the limited amount of financial resources and skilled employees that may be available at the time. When implementing new or changing existing processes, we may encounter transitional issues and incur substantial additional expenses. We cannot be certain that we will institute, in a timely manner or at all, the improvements to our managerial, operational and financial systems and procedures necessary to support our anticipated increased levels of operations. Delays or problems associated with any improvement or expansion of our operational and financial systems could adversely affect our relationships with our suppliers, manufacturers, resellers and customers, harm to our reputation and result in errors in our financial and other reporting, any of which could harm our business and operating results. We may not be able to manage our growth effectively, and as a result may not be able to take advantage of market opportunities, execute on expansion strategies or meet the demands of our customers. In particular, we anticipate that our legacy enterprise resource management system will need to be replaced in the near to intermediate term in order to accommodate our expanding operations. Such transitions can prove difficult and time consuming which can adversely impact our business and ability to timely prepare our external financial reports.

We have identified material weaknesses in our internal control over financial reporting and, if our remediation of these material weaknesses is not effective, or if we fail to maintain an effective system of internal control over financial reporting in the future, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence and the price of our common stock.

As a public company, we will be required to maintain internal control over financial reporting and to evaluate and determine the effectiveness of our internal control over financial reporting. Beginning with our second annual report on Form 10-K following this offering, we will be required to provide a management report on internal control over financial reporting, as well as an attestation of our independent registered public accounting firm, assuming we are no longer an emerging growth company.

During 2017, we identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. We identified a material weakness related to an insufficient complement of experienced personnel with the requisite technical knowledge of financial statement disclosures and accounting for non-routine, unusual or complex events and transactions. This material weakness in our control environment contributed to an additional material weakness in that we did not maintain effective internal controls to address the accounting of non-routine, unusual or complex events and transactions and the related financial statement presentation of such transactions.

We are taking steps to address these control issues, including the following:

• hiring of experienced additional accounting and financial reporting personnel; and

• creation of additional controls including those designed to strengthen our review processes around financial statement disclosures and accounting for non-routine, unusual or complex transactions

While we believe that these efforts will improve our internal control over financial reporting, the implementation of these measures is ongoing and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles.

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We cannot assure you that the measures we have taken to date, and that we are continuing to implement, will be sufficient to remediate the material weaknesses we have identified or avoid the identification of additional material weaknesses in the future. If the steps we take do not remediate the material weaknesses in a timely manner, there could continue to be a reasonable possibility that these control deficiencies or others could result in a material misstatement of our annual or interim financial statements that would not be prevented or detected on a timely basis.

The process of designing and implementing internal control over financial reporting required to comply with the disclosure and attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, will be time consuming and costly. If during the evaluation and testing process, we identify additional material weaknesses in our internal control over financial reporting or determine that existing material weaknesses have not been remediated, our management will be unable to assert that our internal control over financial reporting is effective. Even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may conclude that there are material weaknesses with respect to our internal control over financial reporting. If we are unable to assert that our internal control over financial reporting is effective, or when required in the future, if our independent registered public accounting firm is unable to express an unqualified opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could be adversely affected and we could become subject to litigation or investigations by the stock exchange on which our securities are listed, the Securities and Exchange Commission, or the SEC, or other regulatory authorities, which could require additional financial and management resources.

Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.

Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or the FASB, the American Institute of Certified Public Accountants, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.

We are an emerging growth company under the JOBS Act and we are permitted to rely on exemptions from certain disclosure requirements. We cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, which could be as long as five years following the completion of our initial public offering, we may choose to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404, reduced PCAOB reporting requirements, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and the price of our common stock may be more volatile.

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Risks Related to Ownership of Our Common Stock

Because there has been no prior public market for our common stock, the stock price of our common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock will be determined through negotiations among the underwriters, us and the selling stockholders, and may vary from the market price of our common stock following this offering. The market prices of the securities of newly public companies have historically been highly volatile. The market price of our common stock may fluctuate significantly in response to numerous factors in addition to the ones described in the preceding Risk Factors, many of which are beyond our control, including:

• overall performance of the equity markets and the economy as a whole;

• changes in the financial projections we may provide to the public or our failure to meet these projections;

• actual or anticipated changes in our growth rate relative to that of our competitors;

• announcements of new products, or of acquisitions, strategic partnerships, joint ventures or capital-raising activities or commitments, by us or by our competitors;

• additions or departures of key personnel;

• failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company or our failure to meet these estimates or the expectations of investors;

• rumors and market speculation involving us or other companies in our industry;

• the expiration of contractual lock-up or market standoff agreements; and

• sales of shares of our common stock by us or our stockholders.

In addition, the stock market with respect to newly public companies, particularly companies in the technology industry, have experienced significant price and volume fluctuations that have affected and continue to affect the market prices of stock prices of these companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business.

We will have broad discretion over the use of proceeds from this offering, and we may invest or spend the proceeds in ways with which investors do not agree and in ways that may not yield a return.

We will have broad discretion over the use of proceeds from this offering. Investors may not agree with our decisions, and our use of the proceeds may not yield a return on investment. Our failure to apply the net proceeds of this offering effectively could impair our ability to pursue our growth strategy or could require us to raise additional capital.

Our business and financial performance may differ from any projections that we disclose or any information that may be attributed to us by third parties.

From time to time, we may provide guidance via public disclosures regarding our projected business or financial performance. However, any such projections involve risks, assumptions and uncertainties and our actual results could differ materially from such projections. Factors that could cause or contribute to such differences include, but are not limited to, those identified in these Risk Factors, some or all of which are not predictable or

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within our control. Other unknown or unpredictable factors also could adversely impact our performance, and we undertake no obligation to update or revise any projections, whether as a result of new information, future events or otherwise. In addition, various news sources, bloggers and other publishers often make statements regarding our historical or projected business or financial performance, and you should not rely on any such information even if it is attributed directly or indirectly to us.

Our stock price and trading volume could decline if securities or industry analysts do not publish about our business, or if they publish unfavorable research.

Equity research analysts do not currently provide coverage of our common stock, and we cannot assure that any equity research analysts will adequately provide research coverage of our common stock after the completion of this offering. A lack of adequate research coverage may harm the liquidity and market price of our common stock. To the extent equity research analysts do provide research coverage of our common stock, we will not have any control over the content and opinions included in their reports. The price of our common stock could decline if one or more equity research analysts downgrade our stock or publish other unfavorable commentary or research. If one or more equity research analysts cease coverage of our company, or fail to regularly publish reports on us, the demand for our common stock could decrease, which in turn could cause our stock price or trading volume to decline.

A total of             , or         %, of the outstanding shares of our common stock after this offering will be restricted from immediate resale but may be sold in the near future. Sales of substantial amounts of our common stock in the public markets, including when the “lock-up” or “market standoff” period ends, or the perception that they might occur, could cause the market price of our common stock to decline.

Sales of a substantial number of shares of our common stock in the public market, particularly sales by our directors, executive officers and principal stockholders, or the perception that these sales might occur, could cause the market price of our common stock to decline. Based on shares of our common stock outstanding as of                 , 2018, we will have                 shares of our common stock outstanding after this offering.

In connection with our initial public offering, our directors, executive officers and the holders of substantially all of our common stock and securities convertible into or exercisable for our common stock have entered into lock-up agreements or market standoff provisions in agreements with us that, for a period of at least 180 days following the date of this prospectus and subject to certain exceptions, prohibit them from offering for sale, selling, contracting to sell, granting any option for the sale of, transferring or otherwise disposing of any shares of our common stock and of any securities convertible into or exercisable for our common stock, without the prior written consent of Morgan Stanley & Co. LLC and Goldman Sachs & Co. LLC or us, as the case may be. Morgan Stanley & Co. LLC and Goldman Sachs & Co. LLC may, in their discretion, permit our security holders to sell shares prior to the expiration of the restrictive provisions contained in the lock-up agreements. Shares held by directors, executive officers, and other affiliates will also be subject to volume limitations under Rule 144 under the Securities Act and various vesting agreements.

As a result of these agreements, subject to the provisions of Rule 144, shares will be available for sale in the public market as follows:

• beginning on the date of this prospectus, the                 shares sold in this offering will be immediately available for sale in the public market;

• beginning 181 days after the date of this prospectus, an additional                 shares will become eligible for sale in the public market, of which                  shares will be held by affiliates and subject to the volume and other restrictions of Rule 144, as described below; and

• the remainder of the shares will be eligible for sale in the public market from time to time thereafter subject, in some cases, to the volume and other restrictions of Rule 144, as described below.

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In addition, a total of                 shares may become available for sale in the public market upon the exercise of currently outstanding stock options that would otherwise expire pursuant to their terms prior to 181 days after the date of this prospectus, including shares held by one of our executive officers. The sale of shares issuable upon exercise of these expiring options have been exempted from the restrictions set forth in the lock-up agreements with the underwriters. See “Shares Eligible for Future Sale” for additional information.

We do not intend to pay dividends for the foreseeable future.

We have never declared or paid any cash dividends on our common stock, and we do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments. In addition, the terms of our credit facilities contain restrictions on our ability to declare and pay cash dividends on our capital stock.

Additional stock issuances could result in significant dilution to our stockholders.

Additional issuances of our capital stock will result in dilution to our existing stockholders. Also, to the extent outstanding options to purchase our capital stock are exercised, there will be further dilution. The amount of dilution could be substantial depending upon the size of the issuance or exercise.

Certain provisions in our corporate charter documents and under Delaware law may prevent or hinder attempts by our stockholders to change our management or to acquire a controlling interest in us, and the market price of our common stock may be lower as a result.

There are provisions in our restated certificate of incorporation and restated bylaws, as they will be in effect following this offering, that may make it difficult for a third party to acquire, or attempt to acquire, control of our company, even if a change in control were considered favorable by our stockholders. These anti-takeover provisions include:

• a classified board of directors so that not all members of our board of directors are elected at one time;

• the ability of our board of directors to determine the number of directors and to fill any vacancies and newly created directorships;

• a requirement that our directors may only be removed for cause;

• a prohibition on cumulative voting for directors;

• the requirement of a super-majority to amend some provisions in our restated certificate of incorporation and restated bylaws;

• authorization of the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;

• an inability of our stockholders to call special meetings of stockholders; and

• a prohibition on stockholder actions by written consent, thereby requiring that all stockholder actions be taken at a meeting of our stockholders.

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Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibit a person who owns 15% or more of our outstanding voting stock from merging or combining with us for a three-year period beginning on the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. Any provision in our restated certificate of incorporation, our restated bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements contained in this prospectus other than statements of historical fact, including statements regarding our future results of operations, financial position, market size and opportunity, our business strategy and plans, the factors affecting our performance and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “expect,” “objective,” “plan,” “potential,” “seek,” “grow,” “target,” “if” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the section titled “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

• our expectations regarding our results of operations, including gross margin, financial condition and cash flows;

• our expectations regarding the development and expansion of our business;

• anticipated trends, challenges and opportunities in our business and in the markets in which we operate;

• our ability to successfully develop and introduce new products at an increased pace;

• our ability to manage our international expansion;

• our ability to expand our customer base and expand sales to existing customers;

• our expectations regarding development of our direct-to-consumer sales channels;

• expansion of our partner network;

• our ability to retain and hire necessary employees and staff our operations appropriately;

• the timing and amount of certain expenses and our ability to achieve operating leverage over time; and

• our ability to maintain, protect and enhance our intellectual property.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we do not intend to update any of these forward-looking statements after the date of this prospectus or to conform these statements to actual results or revised expectations.

You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

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MARKET, INDUSTRY AND OTHER DATA

This prospectus contains estimates and information concerning our industry, our business and the market for our products, including market position, market size and growth rates of the markets in which we participate, that are based on industry publications, surveys and reports. Although we have not independently verified the accuracy or completeness of the data contained in these industry publications, surveys and reports, we believe the publications, surveys and reports are generally reliable, although such information is inherently subject to uncertainties and imprecision. The industry in which we operate is subject to a high degree of uncertainty and risk due to variety of factors, including those described in the section titled “Risk Factors.” These and other factors could cause results to differ materially from those expressed in these publications and reports.

The source of certain statistical data, estimates, forecasts and other information contained in this prospectus are the following independent industry publications or reports:

• Activate, Inc., Activate Tech & Media Outlook 2018, October 2017.

• Futuresource Consulting Ltd., Streaming Music Service Overview & Music Market Update, December 2017.

• IEEE Spectrum/1790 Analytics, Patent Power 2017, December 2017.

• SNL Kagan, Global Broadband Households by Region incl US and Canada, April 2018.

• SNL Kagan, Worldwide Smart Speaker Unit Shipment Forecast, 2017-2022, June 2018.

• Recording Industry Association of America, News and Notes on 2017 RIAA Revenue Statistics, 2017.

• The Nielsen Company (US), LLC, Time with Tunes: How Technology is Driving Music Consumption, November 2017.

The content of the foregoing sources, except to the extent specifically set forth in this prospectus, does not constitute a portion of this prospectus and is not incorporated herein. Nielsen data reflects estimates of market conditions based on samples, and is prepared primarily as a marketing research tool for the media industry and others in the media industry.

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USE OF PROCEEDS

We estimate that our net proceeds from the sale of the shares of common stock that we are offering will be approximately $         million, based on an assumed initial public offering price of $         per share, which is the midpoint of the estimated price range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.

Each $1.00 increase or decrease in the assumed initial public offering price would increase or decrease, as applicable, the net proceeds to us by approximately $         million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. Each increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease, as applicable, the net proceeds to us by approximately $         million, assuming that the assumed initial public offering price, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. If the underwriters’ over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $         million.

The principal purposes of this offering are to obtain additional capital, create a public market for our common stock, facilitate our future access to the public equity markets, increase awareness of our company among potential customers and improve our competitive position. We intend to use the net proceeds from this offering for working capital and other general corporate purposes, which may include sales and marketing activities, research, product development, general and administrative matters and capital expenditures. We may also use a portion of the net proceeds for the acquisition of, or investment in, complementary businesses, products, services, technologies or assets. However, we have no current understandings, commitments or agreements to enter into any such acquisitions or make any such investments.

We have not yet determined our anticipated expenditures and therefore cannot estimate the amounts to be used for each of the purposes discussed above. The amounts and timing of any expenditures will vary depending on the amount of cash generated by our operations, competitive and technological developments and the rate of growth, if any, of our business. Accordingly, our management will have significant discretion and flexibility in applying the net proceeds from this offering, and investors will be relying on the judgment of our management regarding the application of these net proceeds.

Pending the uses described above, we intend to invest the net proceeds from this offering in short-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock, and we do not currently intend to pay any cash dividends after the offering or for the foreseeable future. We expect to retain future earnings, if any, to fund the development and growth of our business. Any future determination to pay dividends on our common stock will be made at the discretion of our board of directors and will depend upon, among other factors, our financial condition, operating results, current and anticipated cash needs, plans for expansion and other factors that our board of directors may deem relevant. In addition, the terms of our credit facilities contain restrictions on our ability to declare and pay cash dividends on our capital stock.

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2018 on:

• an actual basis;

• a pro forma basis to reflect (i) the automatic conversion of 16,241,295 shares of our convertible preferred stock into an equivalent number of shares of common stock and (ii) the filing and effectiveness of our restated certificate of incorporation immediately prior to the completion of this offering; and

• a pro forma as adjusted basis to give effect to (i) the pro forma adjustments set forth above and (ii) the sale and issuance of                  shares of our common stock by us in this offering, at the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The information below is illustrative only, and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of the offering determined at the pricing of this offering. You should read this information together with our consolidated financial statements and related notes appearing elsewhere in this prospectus and the information set forth in “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

	As of March 31, 2018
	Actual			Pro Forma			Pro Forma as Adjusted(1)
	(in thousands, except share amounts and par values)
Cash and cash equivalents	$	117,804		$	117,804		$
Total long-term debt	$	39,657		$	39,657		$
Redeemable convertible preferred stock, $0.001 par value per share, 16,337,537 shares authorized, 16,241,295 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted		90,341			—
Stockholders’ equity:
Preferred stock, $0.001 par value per share; no shares authorized, issued and outstanding, actual; shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted		—			—
Common stock, $0.001 par value per share, 75,729,412 shares authorized, 30,353,616 shares issued and 29,954,029 shares outstanding, actual; 75,729,412 shares authorized, 46,594,911 shares issued and 46,195,324 shares outstanding, pro forma; and                  shares issued and                  shares outstanding, pro forma as adjusted		30			46
Treasury stock, 399,587 shares at cost		(10,953	)		(10,953	)
Additional paid-in capital		223,751			314,076
Accumulated deficit		(174,902	)		(174,902	)
Accumulated other comprehensive loss		(1,803	)		(1,803	)
Total stockholders’ equity		36,123			126,464
Total capitalization	$	166,121		$	166,121		$

(1) Each $1.00 increase or decrease in the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease our cash and cash equivalents, total

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stockholders’ equity and total capitalization by approximately $         million, assuming that the number of shares of our common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions payable by us. Each increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease the amount of our cash and cash equivalents, total stockholders’ equity and total capitalization by approximately $         million, assuming an initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions payable by us. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial price to the public and other terms of this offering determined at pricing.

If the underwriters’ option to purchase additional shares of our common stock were exercised in full, pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity, total capitalization and shares of common stock outstanding as of March 31, 2018 would be $         million, $         million, $         million, $         million and                  shares, respectively.

The number of shares of our common stock issued and outstanding in the table above does not include the following shares:

• 22,893,310 shares of our common stock issuable upon the exercise of stock options outstanding under our 2003 Stock Plan as of March 31, 2018, with a weighted-average exercise price of $19.25 per share;

• 2,507,740 shares of our common stock issuable upon the exercise of stock options granted after March 31, 2018, with an exercise price of $30.21 per share;

• 375,370 shares of our common stock reserved for future issuance under our 2003 Stock Plan as of March 31, 2018 (subsequent to March 31, 2018, the number of shares of common stock reserved for future issuance under our 2003 Stock Plan was increased by 2,000,000 shares); and

• 12,000,000 additional shares of our common stock reserved for future issuance under our equity compensation plans, consisting of:

• 10,600,000 shares of our common stock reserved for future issuance under our 2018 Equity Incentive Plan, which will become effective in connection with this offering; and

• 1,400,000 shares of our common stock reserved for future issuance under our ESPP, which will not become effective immediately but instead allows our compensation committee to select a future date, if at all, upon which to implement our ESPP.

On the date immediately prior to the date of this prospectus, any remaining shares available for issuance under our 2003 Stock Plan will be added to the shares of our common stock reserved for issuance under our 2018 Equity Incentive Plan, and we will cease granting awards under the 2003 Stock Plan. Each of our 2018 Equity Incentive Plan and our ESPP shall contain a provision that will automatically increase the shares of our common stock reserved thereunder each year, as more fully described in “Executive Compensation—Employee Benefit Plans.”

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DILUTION

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock in this offering and the pro forma as adjusted net tangible book value per share of our common stock immediately after the completion of this offering.

As of March 31, 2018, our pro forma net tangible book value was $122.0 million, or $2.64 per share of common stock. Our pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock outstanding as of March 31, 2018, after giving effect to the automatic conversion of 16,241,295 shares of our convertible preferred stock into an equivalent number of shares of common stock immediately prior to the completion of this offering.

After giving further effect to the sale of                  shares of our common stock in this offering, at the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2018 would have been $         million, or $         per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $         per share to our existing stockholders and an immediate dilution of $         per share to investors purchasing shares in this offering. The following table illustrates this dilution:

Assumed initial public offering price per share			$
Pro forma net tangible book value per share as of March 31, 2018	$	2.64
Increase in pro forma net tangible book value per share attributable to investors purchasing shares in this offering
Pro forma as adjusted net tangible book value per share after the completion of this offering
Dilution in pro forma net tangible book value per share to investors purchasing shares in this offering			$

A $1.00 increase or decrease in the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease our pro forma as adjusted net tangible book value by approximately $         per share and the dilution per share to investors in this offering by $         per share, assuming the number of shares of our common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions payable by us.

Similarly, a 1.0 million increase or decrease in the number of shares of our common stock offered by us would increase or decrease our pro forma as adjusted net tangible book value by approximately $         per share and the dilution per share to investors in this offering by $         per share, assuming the assumed initial public offering price remains the same and after deducting estimated underwriting discounts and commissions payable by us. If the underwriters exercise their option to purchase additional shares in full, the pro forma as adjusted net tangible book value per share of our common stock would be $         per share, and the dilution in pro forma net tangible book value per share to investors purchasing shares in this offering would be $         per share.

The following table summarizes, on a pro forma as adjusted basis described above as of March 31, 2018, the differences between existing stockholders and investors purchasing shares in this offering with respect to the number of shares of common stock purchased from us, the total consideration paid to us and the average price

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per share paid, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

	Shares Purchased				Total Consideration				Average Price Per Share
	Number	Percent			Amount	Percent
Existing stockholders				%	$			%	$
Investors purchasing shares in this offering
Total			100.0	%	$		100.0	%

Sales of shares of our common stock by the selling stockholders in this offering will reduce the number of shares of common stock held by existing stockholders to                 , or approximately     % of the total shares of common stock outstanding after the completion of this offering, and will increase the number of shares held by investors purchasing shares in this offering to                 , or approximately     % of the total shares of common stock outstanding after the completion of this offering.

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares. After giving effect to sales of shares in this offering by us and the selling stockholders, if the underwriters exercise their option to purchase additional shares in full, our existing stockholders would own     % and our investors purchasing shares in this offering would own     % of the total number of shares of our common stock outstanding upon the completion of this offering.

The number of shares of our common stock issued and outstanding in the table above does not include the following shares:

• 22,893,310 shares of our common stock issuable upon the exercise of stock options outstanding under our 2003 Stock Plan as of March 31, 2018, with a weighted-average exercise price of $19.25 per share;

• 2,507,740 shares of our common stock issuable upon the exercise of stock options granted after March 31, 2018, with an exercise price of $30.21 per share;

• 375,370 shares of our common stock reserved for future issuance under our 2003 Stock Plan as of March 31, 2018 (subsequent to March 31, 2018, the number of shares of common stock reserved for future issuance under our 2003 Stock Plan was increased by 2,000,000 shares); and

• 12,000,000 additional shares of our common stock reserved for future issuance under our equity compensation plans, consisting of:

• 10,600,000 shares of our common stock reserved for future issuance under our 2018 Equity Incentive Plan, which will become effective in connection with this offering; and

• 1,400,000 shares of our common stock reserved for future issuance under our ESPP, which will not become effective immediately but instead allows our compensation committee to select a future date, if at all, upon which to implement our ESPP.

On the date immediately prior to the date of this prospectus, any remaining shares available for issuance under our 2003 Stock Plan will be added to the shares of our common stock reserved for issuance under our 2018 Equity Incentive Plan, and we will cease granting awards under the 2003 Stock Plan. Each of our 2018 Equity Incentive Plan and our ESPP shall contain a provision that will automatically increase the shares of our common stock reserved thereunder each year, as more fully described in “Executive Compensation—Employee Benefit Plans.”

To the extent that any outstanding options to purchase shares of our common stock are exercised or new awards are granted under our equity compensation plans, there will be further dilution to investors participating in this offering.

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

We have derived the selected consolidated statement of operations data for the fiscal years ended October 3, 2015, October 1, 2016 and September 30, 2017 and the selected consolidated balance sheet data as of October 1, 2016 and September 30, 2017 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the selected consolidated statement of operations data for the fiscal years ended September 28, 2013 and September 27, 2014 and the selected consolidated balance sheet data as of September 28, 2013, September 27, 2014 and October 3, 2015 from our unaudited consolidated financial statements that are not included in this prospectus. We have derived the selected consolidated statement of operations data for the six months ended April 1, 2017 and March 31, 2018 and the selected consolidated balance sheet data as of March 31, 2018 from our unaudited consolidated interim financial statements included elsewhere in this prospectus. Our unaudited consolidated annual and interim financial statements were prepared in accordance with U.S. GAAP on the same basis as our audited consolidated financial statements and include, in the opinion of management, all adjustments, consisting of normal recurring adjustments, that are necessary for the fair statement of the financial information set forth in those financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future, and results for the six months ended March 31, 2018 are not necessarily indicative of results that may be expected for the full fiscal year or any other period. You should read this data together with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.

	Fiscal Year Ended															Six Months Ended
	Sept. 28, 2013			Sept. 27, 2014			Oct. 3, 2015			Oct. 1, 2016			Sept. 30, 2017			Apr. 1, 2017			Mar. 31, 2018
	(in thousands, except per share amounts and percentages)
Consolidated Statement of Operations Data:
Revenue	$	441,942		$	774,512		$	843,524		$	901,284		$	992,526		$	555,353		$	655,670
Cost of revenue(1)		232,952			425,191			461,387			497,885			536,461			309,467			378,128
Gross profit		208,990			349,321			382,137			403,399			456,065			245,886			277,542
Operating expenses
Research and development(1)		44,566			70,623			100,653			107,729			124,394			57,573			68,766
Sales and marketing(1)		124,814			204,847			272,427			258,012			270,162			137,151			153,258
General and administrative(1)		33,984			46,911			64,805			68,531			77,118			35,032			42,959
Total operating expenses		203,364			322,381			437,885			434,272			471,674			229,756			264,983
Operating income (loss)		5,626			26,940			(55,748	)		(30,873	)		(15,609	)		16,130			12,559
Other income (expense), net
Interest expense, net		(39	)		(75	)		(156	)		(2,489	)		(4,260	)		(2,001	)		(2,250	)
Other income (expense), net		611			(3,556	)		(9,631	)		(2,208	)		3,361			(928	)		3,429
Total other income (expense), net		572			(3,631	)		(9,787	)		(4,697	)		(899	)		(2,929	)		1,179
Income (loss) before provision for (benefit from) income taxes		6,198			23,309			(65,535	)		(35,570	)		(16,508	)		13,201			13,738
Provision for (benefit from) income taxes		(2,296	)		1,448			3,242			2,644			(2,291	)		(2,026	)		633
Net income (loss)	$	8,494		$	21,861		$	(68,777	)	$	(38,214	)	$	(14,217	)	$	15,227		$	13,105
Net income (loss) per share attributable to common stockholders(2):
Basic	$	0.03		$	0.38		$	(2.68	)	$	(1.42	)	$	(0.50	)	$	0.18		$	0.13
Diluted	$	0.03		$	0.31		$	(2.68	)	$	(1.42	)	$	(0.50	)	$	0.15		$	0.11
Weighted-average shares used in computing net income (loss) per share attributable to common stockholders, basic(2)		20,154			22,228			25,627			26,937			28,157			27,749			29,595

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	Fiscal Year Ended															Six Months Ended
	Sept. 28, 2013			Sept. 27, 2014			Oct. 3, 2015			Oct. 1, 2016			Sept. 30, 2017			Apr. 1, 2017			Mar. 31, 2018
	(in thousands, except per share amounts and percentages)
Weighted-average shares used in computing net income (loss) per share attributable to common stockholders, diluted(2)		28,097			31,483			25,627			26,937			28,157			36,255			36,683
Pro forma net income (loss) per share attributable to common stockholders, basic(2)													$	(0.32	)				$	0.29
Pro forma net income (loss) per share attributable to common stockholders, diluted(2)													$	(0.32	)				$	0.25
Weighted-average shares used in computing pro forma net income (loss) per share attributable to common stockholders, basic(2)														44,398						45,836
Weighted-average shares used in computing pro forma net income (loss) per share attributable to common stockholders, diluted(2)														44,398						52,924
Other Data:
Products sold		1,474			2,938			3,401			3,514			3,935			2,377			3,071
Adjusted EBITDA(3)	$	24,077		$	56,818		$	(4,613	)	$	29,413		$	55,955		$	49,100		$	50,511
Adjusted EBITDA margin(3)		5.4	%		7.3	%		(0.5	)%		3.3	%		5.6	%		8.8	%		7.7	%

(1) Amounts include stock-based compensation expense as follows:

	Fiscal Year Ended										Six Months Ended
	Sept. 28, 2013		Sept. 27, 2014		Oct. 3, 2015		Oct. 1, 2016		Sept. 30, 2017		Apr. 1, 2017		Mar. 31, 2018
					(in thousands)
Cost of revenue	$	92	$	143	$	236	$	211	$	240	$	114	$	107
Research and development		3,413		5,984		8,186		8,260		13,605		6,607		6,766
Sales and marketing		2,589		5,180		9,791		11,742		15,086		7,274		8,022
General and administrative		2,773		3,471		5,064		5,750		7,619		3,429		4,170
Total stock-based compensation expense	$	8,867	$	14,778	$	23,277	$	25,963	$	36,550	$	17,424	$	19,065

(2) See note 12 of the notes to our consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of our net income (loss) per share attributable to common stockholders, basic and diluted, and pro forma net income (loss) per share attributable to common stockholders, basic and diluted.

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(3) Adjusted EBITDA and adjusted EBITDA margin are financial measures that are not calculated in accordance with U.S. GAAP. See the section titled “—Non-GAAP Financial Measures” below for information regarding our use of these non-GAAP financial measures and a reconciliation of net income (loss) to adjusted EBITDA.

	As of
	Sept. 28, 2013			Sept. 27, 2014			Oct. 3, 2015			Oct. 1, 2016			Sept. 30, 2017			Mar. 31, 2018
							(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	46,277		$	70,613		$	76,352		$	74,913		$	130,595		$	117,804
Working capital		38,819			69,839			27,057			31,866			78,203			117,767
Total assets		149,203			210,967			278,970			278,879			400,020			351,743
Total long-term debt		—			—			20,000			24,501			39,600			39,657
Total liabilities		93,009			114,475			210,192			217,326			309,652			225,279
Redeemable convertible preferred stock		88,714			88,682			88,637			90,341			90,341			90,341
Accumulated deficit		(88,660	)		(66,799	)		(135,576	)		(173,790	)		(188,007	)		(174,902	)
Total stockholders’ equity (deficit)		(32,520	)		7,810			(19,859	)		(28,788	)		27			36,123

Non-GAAP Financial Measures

To supplement our consolidated financial statements presented in accordance with U.S. GAAP, we monitor and consider adjusted EBITDA and adjusted EBITDA margin, which are non-GAAP financial measures. These non-GAAP financial measures are not based on any standardized methodology prescribed by U.S. GAAP and are not necessarily comparable to similarly titled measures presented by other companies.

We define adjusted EBITDA as net income (loss) adjusted to exclude the impact of depreciation, stock-based compensation expense, interest expense, net, other income (expense), net and provision for (benefit from) income taxes. We define adjusted EBITDA margin as adjusted EBITDA divided by revenue.

We use these non-GAAP financial measures to evaluate our operating performance and trends and make planning decisions. We believe that these non-GAAP financial measures help identify underlying trends in our business that could otherwise be masked by the effect of the expenses and other items that we exclude in these non-GAAP financial measures. Accordingly, we believe that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to a key financial metric used by our management in its financial and operational decision-making.

Adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with U.S. GAAP. There are a number of limitations related to the use of adjusted EBITDA rather than net income (loss), which is the nearest U.S. GAAP equivalent of adjusted EBITDA, and the use of adjusted EBITDA margin rather than operating margin, which is the nearest U.S. GAAP equivalent of adjusted EBITDA margin. Some of these limitations are:

• these non-GAAP financial measures exclude depreciation and, although these are non-cash expenses, the assets being depreciated may be replaced in the future;

• these non-GAAP financial measures exclude stock-based compensation expense, which has been, and will continue to be, a significant recurring expense for our business and an important part of our compensation strategy;

• these non-GAAP financial measures do not reflect interest expense, or the cash requirements necessary to service interest or principal payments on our debt, which reduces cash available to us;

• these non-GAAP financial measures do not reflect the effect of foreign currency exchange gains or losses, which is included in other income (expense), net;

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• these non-GAAP financial measures do not reflect income tax payments that reduce cash available to us; and

• the expenses and other items that we exclude in our calculation of these non-GAAP financial measures may differ from the expenses and other items, if any, that other companies may exclude from these non-GAAP financial measures when they report their operating results.

Because of these limitations, these non-GAAP financial measures should be considered along with other operating and financial performance measures presented in accordance with U.S. GAAP.

The following table presents a reconciliation of net income (loss) to adjusted EBITDA:

	Fiscal Year Ended															Six Months Ended
	Sept. 28, 2013			Sept. 27, 2014			Oct. 3, 2015			Oct. 1, 2016			Sept. 30, 2017			Apr. 1, 2017			Mar. 31, 2018
							(in thousands, except percentages)
Net income (loss)	$	8,494		$	21,861		$	(68,777	)	$	(38,214	)	$	(14,217	)	$	15,227		$	13,105
Depreciation		9,584			15,100			27,858			34,323			35,014			15,546			18,887
Stock-based compensation expense		8,867			14,778			23,277			25,963			36,550			17,424			19,065
Interest expense, net		39			75			156			2,489			4,260			2,001			2,250
Other (income) expense, net		(611	)		3,556			9,631			2,208			(3,361	)		928			(3,429	)
Provision for (benefit from) for income taxes		(2,296	)		1,448			3,242			2,644			(2,291	)		(2,026	)		633
Adjusted EBITDA	$	24,077		$	56,818		$	(4,613	)	$	29,413		$	55,955		$	49,100		$	50,511
Revenue	$	441,942		$	774,512		$	843,524		$	901,284		$	992,526		$	555,353		$	655,670
Adjusted EBITDA margin		5.4	%		7.3	%		(0.5	)%		3.3	%		5.6	%		8.8	%		7.7	%

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in the section titled “Risk Factors.” We have a 4-4-5 fiscal year ending on the Saturday nearest September 30 each year. Our fiscal year is divided into four quarters, each beginning on a Sunday and containing two 4-week months followed by a 5-week “month.” References to fiscal 2017 are to our fiscal year ended September 30, 2017, references to fiscal 2016 are to our fiscal year ended October 1, 2016 and references to fiscal 2015 are to our fiscal year ended October 3, 2015.

Overview

Sonos was founded with a clear mission—to fill every home with music. This mission led us to invent wireless multi-room home audio. Sonos transforms the way people live and interact by restoring the shared experience of music throughout the home. Our home sound system provides an immersive listening experience created by our thoughtfully designed speakers and components, our proprietary software platform and the ability to wirelessly stream the content our customers love from the services they prefer.

Our innovative products, seamless customer experience and expanding global footprint have driven 12 consecutive years of sustained revenue growth since our first product launch. We generate revenue from the sale of our wireless speakers, home theater speakers and component products, as new customers buy our products and existing customers continue to add products to their Sonos home sound systems.

Historically, we have experienced stronger revenue growth when we have introduced major new products. For example, in calendar year 2013, we introduced both our PLAYBAR and PLAY:1, which led to 75.3% revenue growth for fiscal 2014 compared to the prior fiscal year. In the three years following fiscal 2014, we introduced two products, the second-generation PLAY:5 and PLAYBASE. Due in part to this lower number of product introductions, we had lower revenue growth in those years. However, we were still able to grow our revenue at a compound annual growth rate of 8.5% from fiscal 2015 through fiscal 2017, due to sustained interest in our products, follow-on purchases by our existing customers and an expanded market opportunity.

We have developed a robust product and software roadmap that we believe will help us capture the expanding addressable market for our products. We intend to introduce innovative products at an increased pace compared to the prior three fiscal years. We believe executing on our roadmap will position us to acquire new customers, offer a continuously improving experience to our existing customers and grow follow-on purchases. Our most recent steps in this direction occurred in October 2017, with the introduction of our first voice-enabled wireless speaker, Sonos One, and in July 2018, with the introduction of our first voice-enabled home theater speaker, Sonos Beam.

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As of March 31, 2018, our customers had registered over 19 million products in approximately 6.9 million households worldwide. Acquiring new households is an important driver of our revenue, both in terms of initial purchases as well as creating the foundation for follow-on purchases. As our customers add Sonos to their homes and listen to more music, they typically increase the number of our products in their homes. In fiscal 2017, follow-on purchases represented approximately 38% of new product registrations. As we execute on our product roadmap to address evolving consumer preferences, we believe we can expand the number of products in our customers’ homes.

As of March 31, 2018, 61% of our 6.9 million households had registered more than one Sonos product, and our customers have typically purchased additional Sonos products over time. From fiscal 2014 through fiscal 2017, customers who initially purchased one Sonos product purchased an average of an additional 1.4 products. Customers who initially purchased more than one Sonos product started with an average of 2.9 Sonos products and purchased an average of an additional two products over that same period.

We have maintained a relatively consistent annual gross margin of approximately 45% over the previous three fiscal years. As we increase the pace of our product introductions, we expect our gross margin to decline in the near to intermediate term as new products gain a larger share of our overall product mix. For example, the launch of our Sonos One product in October 2017 and promotional activity caused our gross margin to decline to 42.3% for the six months ended March 31, 2018. We have historically seen that the gross margin for our newly released products is lowest at launch and has tended to increase over time as we realize cost efficiencies. Accordingly, our future financial performance will be affected by our ability to drive additional savings as we

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scale production over time. In addition, we believe our operating expenses as a percentage of revenue will decline as we grow, enabling us to expand our adjusted EBITDA margin over time.

We sell our products primarily through over 10,000 third-party physical retail stores, including custom installers of home audio systems. We also sell through select e-commerce retailers and our website sonos.com. Our products are distributed in over 50 countries, with 55% of our revenue in fiscal 2017 generated outside the United States. We operate offices and development labs worldwide, with a significant presence in the United States, the Netherlands and China.

Key Metrics

In addition to the measures presented in our consolidated financial statements, we use the following additional key metrics to evaluate our business, measure our performance, identify trends affecting our business and assist us in making strategic decisions. Our key metrics are products sold, adjusted EBITDA and adjusted EBITDA margin.

Net income (loss) is the most directly comparable financial measure calculated under U.S. GAAP for adjusted EBITDA. In the fiscal years ended October 3, 2015, October 1, 2016 and September 30, 2017, we had net losses of $68.8 million, $38.2 million and $14.2 million, respectively. In the six months ended April 1, 2017 and March 31, 2018, we had net income of $15.2 million and $13.1 million, respectively.

	Fiscal Year Ended									Six Months Ended
	Oct. 3, 2015			Oct. 1, 2016			Sept. 30, 2017			Apr. 1, 2017			Mar. 31, 2018
	(in thousands, except percentages)
Products sold		3,401			3,514			3,935			2,377			3,071
Adjusted EBITDA	$	(4,613	)	$	29,413		$	55,955		$	49,100		$	50,511
Adjusted EBITDA margin		(0.5	)%		3.3	%		5.6	%		8.8	%		7.7	%

Products Sold

Products sold represents the number of products that are sold during a period, net of returns. Products sold includes the sale of wireless speakers, home theater speakers and components. Products sold excludes the sale of other products, such as Sonos and third-party accessories. Historically, the sale of these accessories has not materially contributed to our revenue and we expect this trend to continue. Growth rates between products sold and revenue are not perfectly correlated because our revenue is affected by other variables, such as the mix of products sold during the period, promotional discount activity and the introduction of new products that may have higher or lower than average selling prices.

Adjusted EBITDA and Adjusted EBITDA Margin

We define adjusted EBITDA as net income (loss) adjusted to exclude the impact of stock-based compensation expense, depreciation, interest expense, net, other income (expense), net and provision for (benefit from) income taxes. We define adjusted EBITDA margin as adjusted EBITDA divided by revenue.

See the section titled “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures” for information regarding our use of adjusted EBITDA and adjusted EBITDA margin, and a reconciliation of net income (loss) to adjusted EBITDA.

Factors Affecting Our Future Performance

New Product Introductions. Since 2005, we have released 13 products, including PLAY:1, PLAY:3, PLAY:5 and Sonos One in the wireless speaker category, PLAYBASE, PLAYBAR, SUB and Sonos Beam in the

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home theater speaker category and CONNECT:AMP and CONNECT in the components category. To date, new product introductions have had a positive impact on our revenue. We intend to introduce new products that appeal to a broad set of consumers and to increase the cadence of new product launches. As we increase the pace of our product introductions, we expect our gross margin to decline in the near to intermediate term as new products gain a larger share of our overall product mix. Accordingly, our future financial performance will be affected by our ability to drive cost of revenue savings as we scale production over time.

Voice Control. We believe voice control technology is disrupting the home audio market and changing what consumers expect from a home speaker. Therefore, our product roadmap is focused on delivering products with native voice control. For example, we released Sonos One in the first quarter of fiscal 2018, our entry into the voice-enabled speaker category, and introduced the voice-enabled Sonos Beam in July 2018. Our ability to develop, manufacture and sell voice-enabled speakers that deliver differentiated consumer experiences will be a critical driver of our future performance, particularly as we compete in a larger market with an expanding number of competitors. We currently compete with, and will continue to compete with, companies that have greater resources than we do, some of which have already brought voice-enabled speakers to market. We are also partnering with certain of these companies in the development of our own voice-enabled products. Our competitiveness in the voice-enabled speaker market will depend on successful investment in research and development, market acceptance of our products and our ability to maintain and benefit from these technology partnerships.

Seasonality. Historically, we have experienced the highest levels of revenue in the first fiscal quarter of the year, coinciding with the holiday shopping season. For example, revenue in the first quarter of fiscal 2017 accounted for 37.6% of our revenue for fiscal 2017. Our promotional discounting activity is higher in the first fiscal quarter as well, which negatively impacts gross margin during this period. For example, gross margin in the first quarter of fiscal 2017 was 42.9%, compared to gross margin of 45.9% for all of fiscal 2017, and gross margin in the first quarter of fiscal 2018 was 41.8%. However, our higher sales volume in the holiday shopping season has historically resulted in a higher operating margin in the first fiscal quarter due to positive operating leverage. Given this significant seasonality, accurate forecasting for the first fiscal quarter is critical to our inventory management, as well as to our full-year financial planning and performance.

Ability to Sell Additional Products to Existing Customers. As our customers add Sonos to their homes and listen to more music, they typically increase the number of our products in their homes. In fiscal 2017, follow-on purchases represented approximately 38% of new product registrations. As we execute on our product roadmap to address evolving consumer preferences, we believe we can expand the number of products in our customers’ homes. Our ability to sell additional products to existing customers is a key part of our business model, as follow-on purchases indicate high customer engagement and satisfaction, decrease the likelihood of competitive substitution and result in higher customer lifetime value. We will continue to innovate and invest in product development in order to enhance customer experience and drive sales of additional products to existing customers.

Expansion of Partner Ecosystem. Expanding and maintaining strong relationships with our partners will remain important to our success. We believe our partner ecosystem improves our customer experience, attracting more customers to Sonos, which in turn attracts more partners to the platform further enhancing our customer experience. We believe partners choose to be part of the Sonos platform because it provides access to a large, engaged customer base on a global scale. We look to partner with a wide variety of streaming music services, voice assistants, connected home integrators, content creators and podcast providers. To date, our agreements with these partners have all been on a royalty-free basis. As competition increases, we believe our ability to give users the freedom to choose across the broadest set of streaming services and voice control partners will be a key differentiating factor.

Channel Strategy. We are focused on reaching and converting prospective customers through third-party retail stores, e-commerce retailers, custom installers of home audio systems and our website sonos.com. We are

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investing in our e-commerce capabilities and in-app experience to drive direct sales. Although sales through sonos.com represented 10% of our revenue in fiscal 2017 and 12% in the six months ended March 31, 2018, we believe the growth of our own e-commerce channel will be important to supporting our overall growth and profitability as consumers continue the shift from physical to online sales channels. Our physical retail distribution relies on third-party retailers, as our company-owned stores do not materially contribute to our revenue. While we seek to increase sales through our direct-to-consumer sales channel, we expect that our future sales will continue to be substantially dependent on our third-party retailers. We will continue to seek retail partners that can deliver differentiated in-store experiences to support customer demand for product demonstrations. We anticipate that the total number of our third-party retail stores will decrease in the near term as we increase our focus on a smaller set of retailers that can deliver a superior experience for prospective customers.

International Expansion. Our products are sold in over 50 countries and we have experienced growth in our international brand awareness and revenue in recent periods. In fiscal 2017, 55% of our revenue was generated outside the United States. Our international growth will depend on our ability to generate sales from the global population of consumers, to develop international distribution channels and diversify our partner ecosystem to appeal to a more global audience. We are committed to strengthening our brand in global markets, and our future success will depend in significant part on our growth in international markets.

Investing in Product Development. Our investments in product development consist primarily of expenses in personnel who support our research and development efforts and capital expenditures for new tooling and production line equipment to manufacture and test our products. We believe that our financial performance will significantly depend on the effectiveness of our investments to design and introduce innovative new products and enhance existing products. If we fail to innovate and expand our product offerings, or fail to maintain high standards of quality in our products, our brand, market position and revenue will be adversely affected. Further, if our product development efforts are not successful, we will not recover the investments made.

Investing in Sales and Marketing. We intend to continue to invest significant resources in our marketing and brand development efforts. Our marketing investments are focused on increasing brand awareness through advertising, public relations and brand promotion activities. While we maintain a base level of investment throughout the year, significant increases in spending are highly correlated with the holiday shopping season, new product launches and software introductions. We also invest in capital expenditures on product displays to support our retail channel partners. Sales and marketing investments are typically incurred in advance of any revenue benefits from these activities.

Components of Results of Operations

Revenue

We generate substantially all of our revenue from the sale of wireless speakers, home theater speakers and components. We also generate a small portion of our revenue from the sale of Sonos and third-party accessories, such as speaker stands and wall mounts. Our revenue is recognized net of allowances for returns, discounts, sales incentives and any taxes collected from customers. We also defer a portion of our revenue that is allocated to unspecified software upgrades and cloud-based services. Our revenue is subject to fluctuation based on the foreign currency in which our products are sold, principally for sales denominated in the euro and the British pound.

For a description of our revenue recognition policies, see the section titled “—Critical Accounting Policies and Estimates.”

Cost of Revenue

Cost of revenue consists of product costs, including costs of our contract manufacturer for production, component costs, shipping and handling costs, warranty replacement costs, packaging, fulfillment costs,

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manufacturing and tooling equipment depreciation, warehousing costs, hosting costs and excess and obsolete inventory write-downs. In addition, we allocate certain costs related to management and facilities, personnel-related expenses and other expenses associated with supply chain logistics. Personnel-related expenses consist of salaries, bonuses, benefits and stock-based compensation expense.

Gross Profit and Gross Margin

Our gross margin may in the future fluctuate from period to period based on a number of factors, including the mix of products we sell, the channel through which we sell our products and the foreign currency in which our products are sold. As we increase the pace of our product introductions, we expect our gross margin to decline in the near to intermediate term as new products gain a larger share of our overall product mix. We have historically seen that the gross margin for our newly released products are lowest at launch and have tended to increase over time as we realize cost efficiencies. In addition, our ability to reduce the cost of our products is critical to increasing our gross margin over the long term. In this regard, we believe our ability to achieve these results will be negatively impacted through calendar year 2019 due to an industry-wide supply shortage of multilayer ceramic capacitors, arising from an imbalance of global demand and supply capacity and related increases in the costs of these components.

Operating Expenses

Operating expenses consist of research and development, sales and marketing and general and administrative expenses. As we transition to being a public company, we expect to increase our overall personnel-related expenses, particularly cash compensation expenses, and we expect to have a greater percentage of our personnel expenses in the form of cash expenses as compared to stock-based compensation expenses.

Research and Development. Research and development expenses consist primarily of personnel-related expenses, consulting and contractor expenses, tooling, test equipment and prototype materials and allocated overhead costs. To date, software development costs have been expensed as incurred, because the period between achieving technological feasibility and the release of the software has been short and development costs qualifying for capitalization have been insignificant. We expect our research and development expenses to increase in absolute dollars as we continue to make significant investments in developing new products and enhancing existing products. We also anticipate that these expenses will decline as a percentage of our revenue over the long term, but that they may fluctuate with our investments in product development in a given quarter.

Sales and Marketing. Sales and marketing expenses represent the largest component of our operating expenses and consist primarily of advertising and marketing promotions of our products and personnel-related expenses, as well as trade show and event costs, sponsorship costs, consulting and contractor expenses, travel, product display expenses and related depreciation, customer care costs and allocated overhead costs. We expect our sales and marketing expenses to increase in absolute dollars as we continue to actively promote our products. We also anticipate that these expenses will decrease as a percentage of our revenue, but that they may fluctuate as we introduce new products.

General and Administrative. General and administrative expenses consist of personnel-related expenses for our finance, legal, human resources and administrative personnel, as well as the costs of professional services, any allocated overhead, information technology, litigation expenses, patent costs and other administrative expenses. We expect our general and administrative expenses to increase in absolute dollars due to the growth of our business and related infrastructure as well as legal, accounting, insurance, investor relations and other costs associated with becoming a public company. However, we expect our general and administrative expenses to decrease as a percentage of our revenue as we scale our business.

Other Income (Expense), Net

Interest Expense, Net. Interest expense consists primarily of interest expense associated with our debt financing arrangements and amortization of debt issuance costs. Interest income consists primarily of interest income earned on our cash and cash equivalents balances.

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Other Income (Expense), Net. Other income (expense), net consists primarily of our foreign currency exchange gains and losses relating to transactions and remeasurement of asset and liability balances denominated in currencies other than the U.S. dollar. We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates.

Provision for (Benefit from) Income Taxes

We are subject to income taxes in the United States and foreign jurisdictions in which we operate. Our provision for (benefit from) income taxes results principally from our foreign operations. Foreign jurisdictions have statutory tax rates different from those in the United States. Accordingly, our effective tax rates will vary depending on the relative proportion of foreign to U.S. income, the utilization of foreign tax credits and changes in tax laws.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided when it is more likely than not that the deferred tax assets will not be realized. We have established a full valuation allowance to offset our U.S. and certain foreign net deferred tax assets due to the uncertainty of realizing future tax benefits from our net operating loss carryforwards and other deferred tax assets.

As of September 30, 2017, we had gross U.S. federal net operating loss carryforwards of $141.8 million, which expire beginning in 2026, and gross state net operating loss carryforwards of $75.3 million, which expire beginning in 2020, as well as $4.1 million in foreign net operating loss carryforwards, which have an indefinite life. Also as of September 30, 2017, we had U.S. federal and state research and development tax credit carryforwards of $18.8 million and $15.7 million. The federal research credits will begin to expire in the year 2025, and the state research credits will begin to expire in 2024. We last completed a study in 2015 to determine whether an ownership change had occurred under Section 382 or 383 of the Code, and we determined at that time that an ownership change may have occurred in 2012. As a result, our net operating losses generated through July 18, 2012 may be subject to limitation under Section 382 of the Code. The amount of pre-change loss carryforward which may be subject to this limitation is $46.8 million. Our ability to use net operating loss carry forwards and other tax attributes to reduce future taxable income and liabilities may be subject to limitations based on the ownership change of 2012, possible changes since that time or as a result of this offering. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards or other pre-change tax attributes to offset U.S. federal and state taxable income may still be subject to limitations, which could potentially result in increased future tax liability to us.

On December 22, 2017, President Trump signed the Tax Act into law, implementing a wide variety of changes to the U.S. tax system. Among other changes at the corporate level, the Tax Act includes (i) a reduction in the U.S. federal corporate income tax rate from 35% to 21%, (ii) further limitations on the deductibility of interest expense and certain executive compensation, (iii) the repeal of the corporate alternative minimum tax, (iv) the imposition of a territorial tax system with a one-time repatriation tax on deemed repatriated earnings of foreign subsidiaries and (v) a subjecting of certain foreign earnings to U.S. taxation through a BEAT and a new tax related to GILTI. Additionally, certain FDII may prospectively be subject to a reduced rate of income tax from the statutorily enacted rate of 21%. Some of these changes, including the BEAT, FDII and GILTI provisions, will not come into effect until our 2019 fiscal year, but because the decrease in the corporate income tax rate was effective January 1, 2018, we have reduced the future tax benefits of our existing U.S. deferred tax assets. However, since we maintain a full valuation allowance against these assets, for the six months ended March 31, 2018 this did not have a material impact on our results of operations or financial condition. We have not recorded a provision related to the one-time transition tax under Section 965 of the Code as we have estimated that our foreign subsidiaries have a consolidated deficit in accumulated and current earnings and profits.

Our accounting for the elements of the Tax Act is incomplete. We have made reasonable estimates of the effects to the consolidated statements of income and consolidated balance sheets and have preliminarily

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determined that a provision is not required. The ultimate impact of the Tax Act may differ from the above estimates due to potential future legislative action to address questions that have arisen because of the Tax Act, issuance of additional guidance by the IRS to provide clarity on certain provisions of the Tax Act and any changes in accounting standards for income taxes or related interpretations in response to the Tax Act. The SEC has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. We currently anticipate finalizing and recording any resulting adjustments by the end of our fiscal quarter ending December 29, 2018.

Results of Operations

The following table sets forth our consolidated results of operations for the periods indicated. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.

	Fiscal Year Ended									Six Months Ended
	Oct. 3, 2015			Oct. 1, 2016			Sept. 30, 2017			Apr. 1, 2017			Mar. 31, 2018
	(in thousands)
Revenue	$	843,524		$	901,284		$	992,526		$	555,353		$	655,670
Cost of revenue(1)		461,387			497,885			536,461			309,467			378,128
Gross profit		382,137			403,399			456,065			245,886			277,542
Operating expenses
Research and development(1)		100,653			107,729			124,394			57,573			68,766
Sales and marketing(1)		272,427			258,012			270,162			137,151			153,258
General and administrative(1)		64,805			68,531			77,118			35,032			42,959
Total operating expenses		437,885			434,272			471,674			229,756			264,983
Operating income (loss)		(55,748	)		(30,873	)		(15,609	)		16,130			12,559
Other income (expense), net
Interest expense, net		(156	)		(2,489	)		(4,260	)		(2,001	)		(2,250	)
Other income (expense), net		(9,631	)		(2,208	)		3,361			(928	)		3,429
Total other income (expense), net		(9,787	)		(4,697	)		(899	)		(2,929	)		1,179
Income (loss) before provision for (benefit from) income taxes		(65,535	)		(35,570	)		(16,508	)		13,201			13,738
Provision for (benefit from) income taxes		3,242			2,644			(2,291	)		(2,026	)		633
Net income (loss)	$	(68,777	)	$	(38,214	)	$	(14,217	)	$	15,227		$	13,105
Adjusted EBITDA(2)	$	(4,613	)	$	29,413		$	55,955		$	49,100		$	50,511

(1) Amounts include stock-based compensation expense as follows:

	Fiscal Year Ended						Six Months Ended
	Oct. 3, 2015		Oct. 1, 2016		Sept. 30, 2017		Apr. 1, 2017		Mar. 31, 2018
	(in thousands)
Cost of revenue	$	236	$	211	$	240	$	114	$	107
Research and development		8,186		8,260		13,605		6,607		6,766
Sales and marketing		9,791		11,742		15,086		7,274		8,022
General and administrative		5,064		5,750		7,619		3,429		4,170
Total stock-based compensation expense	$	23,277	$	25,963	$	36,550	$	17,424	$	19,065

(2) Adjusted EBITDA is a financial measure that is not calculated in accordance with U.S. GAAP. See the section titled “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures.”

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The following table sets forth selected historical consolidated financial data for the periods indicated, expressed as a percentage of revenue (the table may not foot due to rounding):

	Fiscal Year Ended									Six Months Ended
	Oct. 3, 2015			Oct. 1, 2016			Sept. 30, 2017			Apr. 1, 2017			Mar. 31, 2018
Revenue		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenue(1)		54.7			55.2			54.1			55.7			57.7
Gross profit		45.3			44.8			45.9			44.3			42.3
Operating expenses
Research and development(1)		11.9			12.0			12.5			10.4			10.5
Sales and marketing(1)		32.3			28.6			27.2			24.7			23.4
General and administrative(1)		7.7			7.6			7.8			6.3			6.6
Total operating expenses		51.9			48.2			47.5			41.4			40.4
Operating income (loss)		(6.6	)		(3.4	)		(1.6	)		2.9			1.9
Other income (expense), net
Interest expense, net		—			(0.3	)		(0.4	)		(0.4	)		(0.3	)
Other income (expense), net		(1.1	)		(0.2	)		0.3			(0.2	)		0.5
Total other income (expense), net		(1.2	)		(0.5	)		(0.1	)		(0.5	)		0.2
Loss before provision for (benefit from) income taxes		(7.8	)		(3.9	)		(1.7	)		2.4			2.1
Provision for (benefit from) income taxes		0.4			0.3			(0.2	)		(0.4	)		0.1
Net income (loss)		(8.2	)%		(4.2	)%		(1.4	)%		2.7	%		2.0	%
Adjusted EBITDA margin(2)		(0.5	)%		3.3	%		5.6	%		8.8	%		7.7	%

(1) Amounts include stock-based compensation expense as a percentage of revenue as follows:

	Fiscal Year Ended									Six Months Ended
	Oct. 3, 2015			Oct. 1, 2016			Sept. 30, 2017			Apr. 1, 2017			Mar. 31, 2018
Cost of revenue		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%
Research and development		1.0			0.9			1.4			1.2			1.0
Sales and marketing		1.2			1.3			1.5			1.3			1.2
General and administrative		0.6			0.6			0.8			0.6			0.6
Total stock-based compensation expense		2.8	%		2.9	%		3.7	%		3.1	%		2.9	%

(2) Adjusted EBITDA margin is a financial measure that is not calculated in accordance with U.S. GAAP. See the section titled “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures.”

Comparison of the Six Months Ended April 1, 2017 and March 31, 2018

Revenue

	Six Months Ended				Change
	Apr. 1, 2017		Mar. 31, 2018		$		%
	(dollars in thousands)
Revenue	$	555,353	$	655,670	$	100,317		18.1	%

Revenue increased by $100.3 million, or 18.1%, from $555.4 million for the six months ended April 1, 2017 to $655.7 million for the six months ended March 31, 2018, due to a 29.2% increase in the number of products sold from 2.4 million in the six months ended April 1, 2017 to 3.1 million in the six months ended March 31, 2018. The volume growth was primarily driven by sales of our newest wireless speaker product, Sonos One, which launched in October 2017. Revenue growth from the sale of our wireless speakers was primarily driven by sales of our new Sonos One product launched in October 2017, while growth from the sale of our home theater speakers was driven by sales of our new PLAYBASE product launched in April 2017.

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Revenue from the Americas increased $50.8 million, or 18.5%, from $273.9 million for the six months ended April 1, 2017 to $324.7 million for the six months ended March 31, 2018. Revenue from Europe, the Middle East and Africa, or EMEA, and Asia Pacific, or APAC, increased $49.5 million, or 17.6%, from $281.4 million in the six months ended April 1, 2017 to $330.9 million in the six months ended March 31, 2018. In constant U.S. dollars, revenue grew by 13% for the six months ended March 31, 2018 compared to the six months ended April 1, 2017, which excludes the positive impact of foreign currency as the U.S. dollar weakened against the euro and the British pound. We calculate constant currency growth percentages by translating our prior-period financial results using the current period average currency exchange rates and comparing these amounts to our current period reported results.

Cost of Revenue and Gross Profit

	Six Months Ended						Change
	Apr. 1, 2017			Mar. 31, 2018			$		%
	(dollars in thousands)
Cost of revenue	$	309,467		$	378,128		$	68,661		22.2	%
Gross profit		245,886			277,542			31,656		12.9
Gross margin		44.3	%		42.3	%

Cost of revenue increased $68.7 million, or 22.2%, from $309.5 million for the six months ended April 1, 2017 to $378.1 million for the six months ended March 31, 2018. The increase was primarily due to the increase in the number of products sold.

Gross margin decreased by 2.0 percentage points for the six months ended March 31, 2018 compared to the six months ended April 1, 2017, primarily due to the impact of lower margins on wireless speakers in connection with the launch of our new Sonos One product in October 2017, as well as lower retail prices on our older wireless speakers.

Research and Development

	Six Months Ended						Change
	Apr. 1, 2017			Mar. 31, 2018			$		%
	(dollars in thousands)
Research and development	$	57,573		$	68,766		$	11,193		19.4	%
Percentage of revenue		10.4	%		10.5	%

Research and development expenses increased $11.2 million, or 19.4%, from $57.6 million for the six months ended April 1, 2017 to $68.8 million for the six months ended March 31, 2018. The increase was primarily due to higher personnel-related expenses of $11.0 million as our headcount increased during the period.

Sales and Marketing

	Six Months Ended						Change
	Apr. 1, 2017			Mar. 31, 2018			$		%
	(dollars in thousands)
Sales and marketing	$	137,151		$	153,258		$	16,107		11.7	%
Percentage of revenue		24.7	%		23.4	%

Sales and marketing expenses increased $16.1 million, or 11.7%, from $137.2 million for the six months ended April 1, 2017 to $153.3 million for the six months ended March 31, 2018. The increase was primarily due

58

to an increase of $8.2 million in personnel-related costs due to increased headcount, an increase of $4.6 million in costs related to the launch of new retail stores and increased third-party customer care activity, an increase of $2.3 million in product display depreciation and an increase of $0.9 million in overhead costs.

General and Administrative

	Six Months Ended						Change
	Apr. 1, 2017			Mar. 31, 2018			$		%
	(dollars in thousands)
General and administrative	$	35,032		$	42,959		$	7,927		22.6	%
Percentage of revenue		6.3	%		6.6	%

General and administrative expenses increased $7.9 million, or 22.6%, from $35.0 million for the six months ended April 1, 2017 to $43.0 million for the six months ended March 31, 2018. The increase was primarily due to an increase in personnel-related costs of $4.9 million, predominantly driven by growth in headcount. In addition, professional services increased $3.3 million primarily for audit, compliance and other fees related to the preparation for this offering, as well as external legal fees related to our recently settled patent infringement case against Denon.

Interest Expense, Net and Other Income (Expense), Net

	Six Months Ended						Change
	Apr. 1, 2017			Mar. 31, 2018			$			%
	(dollars in thousands)
Interest expense, net	$	(2,001	)	$	(2,250	)	$	(249	)		12.4	%
Other income (expense), net		(928	)		3,429			4,357			*

* not meaningful

The increase in interest expense was driven by a $15.0 million increase in the principal balance of our term loan in the first quarter of fiscal 2017. Other income (expense), net changed by $4.4 million from other expense of $0.9 million for the six months ended April 1, 2017 to other income of $3.4 million for the six months ended March 31, 2018, due to foreign currency exchange gains, net, caused by the weakening of the U.S. dollar against the euro and the British pound.

Provision for (Benefit from) Income Taxes

	Six Months Ended					Change
	Apr. 1, 2017			Mar. 31, 2018		$		%
	(dollars in thousands)
Provision for (benefit from) income taxes	$	(2,026	)	$	633	$	2,659		(131.2	)%

Provision for income taxes changed from a tax benefit of $2.0 million for the six months ended April 1, 2017 to a provision for income taxes of $0.6 million for the six months ended March 31, 2018. In fiscal 2017, we amended a tax audit settlement agreement with the Dutch Tax Administration, which, among other things, resulted in a release of previously accrued tax liabilities for Sonos Europe B.V. that was partially offset by the establishment of a valuation allowance based on cumulative losses, resulting in a net tax benefit in the first six months of fiscal 2017.

59

Comparison of Fiscal Years 2015, 2016 and 2017

Revenue

	Fiscal Year Ended				Change from Prior Fiscal Year					Fiscal Year Ended		Change from Prior Fiscal Year
	Oct. 3, 2015		Oct. 1, 2016		$		%			Sept. 30, 2017		$		%
	(dollars in thousands)
Revenue	$	843,524	$	901,284	$	57,760		6.8	%	$	992,526	$	91,242		10.1	%

Fiscal 2016 Compared to Fiscal 2017. Revenue increased by $91.2 million, or 10.1%, from $901.3 million for fiscal 2016 to $992.5 million for fiscal 2017, due to an increase in the number of products sold from 3.5 million in fiscal 2016 to 3.9 million in fiscal 2017. The growth was primarily driven by increased sales of our home theater speaker products. Revenue growth from the sale of our home theater speakers was primarily driven by sales of our new PLAYBASE product launched in April 2017, as well as by sales of a new white version of our SUB product.

Revenue from the Americas increased $53.4 million, or 12.0%, from $443.3 million for fiscal 2016 to $496.7 million for fiscal 2017. Revenue from EMEA and from APAC increased $37.9 million, or 8.3%, from $458.0 million for fiscal 2016 to $495.9 million for fiscal 2017. In constant U.S. dollars, consolidated revenue grew by 12% for the full fiscal year, which excludes the negative impact of foreign currency as the U.S. dollar strengthened against the euro and the British pound. We calculate constant currency growth percentages by translating our prior-period financial results using the current period average currency exchange rates and comparing these amounts to our current period reported results.

Fiscal 2015 Compared to Fiscal 2016. Revenue increased by $57.8 million, or 6.8%, from $843.5 million for fiscal 2015 to $901.3 million for fiscal 2016. We increased the number of products sold from 3.4 million in fiscal 2015 to 3.5 million in fiscal 2016. Revenue growth was primarily driven by increased sales of our wireless speaker products, including the second-generation PLAY:5 product, which was introduced in November 2015.

Revenue from the Americas increased $32.6 million, or 7.9%, from $410.7 million for fiscal 2015 to $443.3 million for fiscal 2016. Revenue from EMEA and APAC increased $25.1 million, or 5.8%, from $432.8 million for fiscal 2015 to $458.0 million for fiscal 2016. In constant U.S. dollars, revenue grew by 10% for the full fiscal year, which excludes the negative impact of foreign currency exchange rates.

Cost of Revenue and Gross Profit

	Fiscal Year Ended						Change from Prior Fiscal Year					Fiscal Year Ended			Change from Prior Fiscal Year
	Oct. 3, 2015			Oct. 1, 2016			$		%			Sept. 30, 2017			$		%
	(dollars in thousands)
Cost of revenue	$	461,387		$	497,885		$	36,498		7.9	%	$	536,461		$	38,576		7.7	%
Gross profit		382,137			403,399			21,262		5.6			456,065			52,666		13.1
Gross margin		45.3	%		44.8	%							45.9	%

Fiscal 2016 Compared to Fiscal 2017. Cost of revenue increased $38.6 million, or 7.7%, from $497.9 million for fiscal 2016 to $536.5 million for fiscal 2017. The increase was primarily due to the increase in number of products sold, partially offset by a decrease of per unit production costs resulting from supply chain improvement initiatives.

60

Gross margin increased to 45.9% for fiscal 2017 from 44.8% for fiscal 2016. The increase was primarily due to the reduction of per unit production costs, and partially offset by the negative impact of foreign currency as the U.S. dollar strengthened against the euro and the British pound.

Fiscal 2015 Compared to Fiscal 2016. Cost of revenue increased $36.5 million, or 7.9%, from $461.4 million for fiscal 2015 to $497.9 million for fiscal 2016. The increase was primarily due to the increase in number of products sold.

Gross margin decreased to 44.8% for fiscal 2016 from 45.3% for fiscal 2015. This decrease was partially due to a shift in product mix, including the impact of the higher manufacturing costs associated with our second-generation PLAY:5, and the negative impacts of foreign currency exchange rates.

Research and Development

	Fiscal Year Ended						Change from Prior Fiscal Year					Fiscal Year Ended			Change from Prior Fiscal Year
	Oct. 3, 2015			Oct. 1, 2016			$		%			Sept. 30, 2017			$		%
	(dollars in thousands)
Research and development	$	100,653		$	107,729		$	7,076		7.0	%	$	124,394		$	16,665		15.5	%
Percentage of revenue		11.9	%		12.0	%							12.5	%

Fiscal 2016 Compared to Fiscal 2017. Research and development expenses increased $16.7 million, or 15.5%, from $107.7 million for fiscal 2016 to $124.4 million for fiscal 2017. The increase was primarily due to higher personnel-related expenses of $8.6 million as our headcount increased during the period, an increase in new product development expenses of $4.1 million related to prototypes, pre-production tooling and consulting and an increase of $4.2 million in overhead costs.

Fiscal 2015 Compared to Fiscal 2016. Research and development expenses increased $7.1 million, or 7.0%, from $100.7 million for fiscal 2015 to $107.7 million for fiscal 2016. The increase was primarily due to personnel-related expenses of $7.5 million, due to an increase in headcount, as well as increases in overhead costs of $3.3 million and depreciation of lab equipment at our engineering sites of $2.2 million, offset by a decrease of $6.0 million, which consisted primarily of new product development expenses.

Sales and Marketing

	Fiscal Year Ended						Change from Prior Fiscal Year						Fiscal Year Ended			Change from Prior Fiscal Year
	Oct. 3, 2015			Oct. 1, 2016			$			%			Sept. 30, 2017			$		%
	(dollars in thousands)
Sales and marketing	$	272,427		$	258,012		$	(14,415	)		(5.3	)%	$	270,162		$	12,150		4.7	%
Percentage of revenue		32.3	%		28.6	%								27.2	%

Fiscal 2016 Compared to Fiscal 2017. Sales and marketing expenses increased $12.2 million, or 4.7%, from $258.0 million for fiscal 2016 to $270.2 million in fiscal 2017. The increase was primarily due to increases of $18.4 million in advertising and other marketing costs focused on brand awareness and the launch of our new PLAYBASE product in April 2017 and an increase of $3.9 million in personnel-related costs. These increases were offset by a decrease of $6.1 million in overhead costs and a decrease of $4.1 million of product display depreciation.

Fiscal 2015 Compared to Fiscal 2016. Sales and marketing expenses decreased $14.4 million, or 5.3%, from $272.4 million for fiscal 2015 to $258.0 million in fiscal 2016. The decrease was primarily due to a

61

reduction of $23.1 million in advertising and other marketing costs. This decrease was offset by an increase of $5.9 million in personnel-related expenses and an increase of $2.9 million in overhead costs.

General and Administrative

	Fiscal Year Ended						Change from Prior Fiscal Year					Fiscal Year Ended			Change from Prior Fiscal Year
	Oct. 3, 2015			Oct. 1, 2016			$		%			Sept. 30, 2017			$		%
	(dollars in thousands)
General and administrative	$	64,805		$	68,531		$	3,726		5.7	%	$	77,118		$	8,587		12.5	%
Percentage of revenue		7.7	%		7.6	%							7.8	%

Fiscal 2016 Compared to Fiscal 2017. General and administrative expenses increased $8.6 million, or 12.5%, from $68.5 million for fiscal 2016 to $77.1 million for fiscal 2017. The increase was primarily due to increases in personnel-related costs of $7.2 million, predominantly driven by growth in headcount. In addition, external legal fees increased by $2.4 million, primarily related to our recently settled patent infringement case against Denon. These increases were partially offset by a reduction in other facilities-related expenses.

Fiscal 2015 Compared to Fiscal 2016. General and administrative expenses increased $3.7 million, or 5.7%, from $64.8 million for fiscal 2015 to $68.5 million for fiscal 2016. The increase was primarily due to increases in personnel-related costs of $2.5 million and other facilities-related expenses of $1.1 million.

Interest Expense, Net and Other Income (Expense), Net

	Fiscal Year Ended						Change from Prior Fiscal Year						Fiscal Year Ended			Change from Prior Fiscal Year
	Oct. 3, 2015			Oct. 1, 2016			$			%			Sept. 30, 2017			$			%
	(dollars in thousands)
Interest expense, net	$	(156	)	$	(2,489	)	$	(2,333	)		*		$	(4,260	)	$	(1,771	)		71.2	%
Other income (expense), net		(9,631	)		(2,208	)		7,423			(77.1	)		3,361			5,569			*

* not meaningful

Fiscal 2016 Compared to Fiscal 2017. Interest expense, net increased by $1.8 million, or 71.2%, from $2.5 million for fiscal 2016 to $4.3 million for fiscal 2017. The increase in interest expense was driven by a $15.0 million increase in the principal balance of our term loan. Other income (expense), net increased $5.6 million, from $2.2 million in expense in fiscal 2016 to $3.4 million in income in fiscal 2017, due to foreign currency exchange gains.

Fiscal 2015 Compared to Fiscal 2016. Interest expense, net increased $2.3 million, from $0.2 million for fiscal 2015 to $2.5 million for fiscal 2016. The increase was due to usage of our credit facility and a new $25.0 million term loan. Other expense, net decreased $7.4 million, or 77.1%, from expense of $9.6 million in fiscal 2015 to expense of $2.2 million in fiscal 2016. The decrease in net expense was due to a reduction of foreign currency exchange losses.

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Provision for (Benefit from) Income Taxes

	Fiscal Year Ended				Change from Prior Fiscal Year						Fiscal Year Ended			Change from Prior Fiscal Year
	Oct. 3, 2015		Oct. 1, 2016		$			%			Sept. 30, 2017			$			%
	(dollars in thousands)
Provision for (benefit from) income taxes	$	3,242	$	2,644	$	(598	)		(18.4	)%	$	(2,291	)	$	(4,935	)		*

* not meaningful

We have incurred cumulative losses in the United States and, accordingly, our U.S. deferred tax assets have been offset by a valuation allowance. In fiscal 2017, we amended our settlement agreement with the Dutch Tax Administration, which, among other things, resulted in a release of previously accrued tax liabilities for Sonos Europe B.V. that was partially offset by the establishment of a valuation allowance based on cumulative losses, which resulted in a net tax benefit in fiscal 2017.

Fiscal 2016 Compared to Fiscal 2017. Provision for income taxes decreased $4.9 million, from $2.6 million for fiscal 2016 to a benefit from income taxes of $2.3 million for fiscal 2017.

Fiscal 2015 Compared to Fiscal 2016. Provision for income taxes decreased $0.6 million, or 18.4%, from $3.2 million for fiscal 2015 to $2.6 million for fiscal 2016.

63

Unaudited Quarterly Results of Operations Data and Other Data

The following tables set forth our unaudited quarterly consolidated statements of operations data in dollars and as a percentage of revenue, as well as other data, for each of the ten quarters ended March 31, 2018. Our unaudited quarterly consolidated statements of operations data were prepared in accordance with U.S. GAAP on the same basis as our audited consolidated financial statements and include, in the opinion of management, all adjustments, consisting of normal recurring adjustments, that are necessary for the fair presentation of the financial information set forth in such data. The sum of quarterly periods may not equal full-year or year-to-date amounts, and percentages may not foot, due to rounding. Our historical results are not necessarily indicative of the results that may be expected in the future, and results for the three months ended March 31, 2018 are not necessarily indicative of results that may be expected for the full fiscal year or any other period. You should read this data together with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.

	Three Months Ended
	Jan. 2, 2016			Apr. 2, 2016			July 2, 2016			Oct. 1, 2016			Dec. 31, 2016			Apr. 1, 2017			July 1, 2017			Sept. 30, 2017			Dec. 30, 2017			Mar. 31, 2018
	(in thousands)
Consolidated Statement of Operations Data:
Revenue	$	369,183		$	164,229		$	181,467		$	186,404		$	372,807		$	182,546		$	223,078		$	214,095		$	468,950		$	186,720
Cost of revenue(1)		212,453			91,438			97,041			96,953			213,025			96,441			115,790			111,204			272,749			105,379
Gross profit		156,730			72,791			84,426			89,451			159,782			86,105			107,288			102,891			196,201			81,341
Operating expenses
Research and development(1)		29,277			27,964			24,630			25,858			28,428			29,145			33,347			33,474			33,529			35,237
Sales and marketing(1)		94,895			57,894			44,541			60,682			77,907			59,244			70,074			62,937			94,025			59,233
General and administrative(1)		17,317			18,029			17,813			15,371			17,444			17,589			20,000			22,087			22,374			20,585
Total operating expenses		141,489			103,887			86,984			101,911			123,779			105,978			123,421			118,498			149,928			115,055
Operating income (loss)		15,241			(31,096	)		(2,558	)		(12,460	)		36,003			(19,873	)		(16,133	)		(15,607	)		46,273			(33,714	)
Other income (expense), net
Interest expense, net		(555	)		(242	)		(893	)		(800	)		(857	)		(1,144	)		(1,185	)		(1,074	)		(1,166	)		(1,085	)
Other income (expense), net		(3,157	)		1,825			(1,189	)		314			(2,217	)		1,289			2,975			1,314			622			2,808
Total other income (expense), net		(3,712	)		1,583			(2,082	)		(486	)		(3,074	)		145			1,790			240			(544	)		1,723
Income (loss) before provision for (benefit from) income taxes		11,529			(29,513	)		(4,640	)		(12,946	)		32,929			(19,728	)		(14,343	)		(15,367	)		45,729			(31,991	)
Provision for (benefit from) income taxes		985			420			746			492			(2,088	)		62			196			(461	)		32			601
Net income (loss)	$	10,544		$	(29,933	)	$	(5,386	)	$	(13,438	)	$	35,017		$	(19,790	)	$	(14,539	)	$	(14,906	)	$	45,697		$	(32,592	)
Other Data:
Products sold		1,675			501			658			680			1,683			694			796			763			2,293			778
Adjusted EBITDA(2)	$	31,444		$	(15,256	)	$	11,285		$	1,939		$	52,462		$	(3,362	)	$	2,306		$	4,549		$	65,356			(14,845	)
Adjusted EBITDA margin(2)		8.5	%		(9.3	)%		6.2	%		1.0	%		14.1	%		(1.8	)%		1.0	%		2.1	%		13.9	%		(8.0)	%

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(1) Amounts include stock-based compensation expense as follows:

	Three Months Ended
	Jan. 2, 2016		Apr. 2, 2016		July 2, 2016		Oct. 1, 2016		Dec. 31, 2016		Apr. 1, 2017		July 1, 2017		Sept. 30, 2017		Dec. 30, 2017		Mar. 31, 2018
	(in thousands)
Cost of revenue	$	57	$	58	$	38	$	59	$	55	$	60	$	65	$	61	$	56	$	51
Research and development		2,072		2,023		1,689		2,475		3,322		3,285		3,529		3,469		3,381		3,384
Sales and marketing		3,303		3,566		2,024		2,849		3,659		3,614		3,899		3,914		3,986		4,037
General and administrative		1,652		1,646		1,299		1,153		1,701		1,727		2,045		2,145		2,114		2,056
Total stock-based compensation expense	$	7,084	$	7,293	$	5,050	$	6,536	$	8,737	$	8,686	$	9,538	$	9,589	$	9,537	$	9,528

(2) Adjusted EBITDA and adjusted EBITDA margin are financial measures that are not calculated in accordance with U.S. GAAP. See “—Non-GAAP Financial Measures” in the section titled “Selected Consolidated Financial and Other Data” above for information regarding our use of these non-GAAP financial measures and “—Non-GAAP Financial Measures” below for a reconciliation of net income (loss) to adjusted EBITDA.

	Three Months Ended
	Jan. 2, 2016			Apr. 2, 2016			July 2, 2016			Oct. 1, 2016			Dec. 31, 2016			Apr. 1, 2017			July 1, 2017			Sept. 30, 2017			Dec. 30, 2017			Mar. 31, 2018
Consolidated Statement of Operations Data:
Revenue		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenue(1)		57.5			55.7			53.5			52.0			57.1			52.8			51.9			51.9			58.2			56.4
Gross profit		42.5			44.3			46.5			48.0			42.9			47.2			48.1			48.1			41.8			43.6
Operating expenses
Research and development		7.9			17.0			13.6			13.9			7.6			16.0			14.9			15.6			7.1			18.9
Sales and marketing		25.7			35.3			24.5			32.6			20.9			32.5			31.4			29.4			20.1			31.7
General and administrative		4.7			11.0			9.8			8.2			4.7			9.6			9.0			10.3			4.8			11.0
Total operating expenses		38.3			63.3			47.9			54.7			33.2			58.1			55.3			55.3			32.0			61.6
Operating income (loss)		4.1			(18.9	)		(1.4	)		(6.7	)		9.7			(10.9	)		(7.2	)		(7.3	)		9.9			(18.1	)
Other income (expense), net
Interest expense, net		(0.2	)		(0.1	)		(0.5	)		(0.4	)		(0.2	)		(0.6	)		(0.5	)		(0.5	)		(0.2	)		(0.6	)
Other income (expense), net		(0.9	)		1.1			(0.7	)		0.2			(0.6	)		0.7			1.3			0.6			0.1			1.5
Total other income (expense), net		(1.0	)		1.0			(1.1	)		(0.3	)		(0.8	)		0.1			0.8			0.1			(0.1	)		0.9
Income (loss) before provision for (benefit from) income taxes		3.1			(18.0	)		(2.6	)		(6.9	)		8.8			(10.8	)		(6.4	)		(7.2	)		9.8			(17.1	)
Provision for (benefit from) income taxes		0.3			0.3			0.4			0.3			(0.6	)		—			0.1			(0.2	)		—			0.3
Net income (loss)		2.9	%		(18.2	)%		(3.0	)%		(7.2	)%		9.4	%		(10.8	)%		(6.5	)%		(7.0	)%		9.7	%		(17.5	)%
Adjusted EBITDA margin(2)		8.5	%		(9.3	)%		6.2	%		1.0	%		14.1	%		(1.8	)%		1.0	%		2.1	%		13.9	%		(8.0	)%

(1) Amounts include stock-based compensation expense as follows:

	Three Months Ended
	Jan. 2, 2016			Apr. 2, 2016			July 2, 2016			Oct. 1, 2016			Dec. 31, 2016			Apr. 1, 2017			July 1, 2017			Sept. 30, 2017			Dec. 30, 2017			Mar. 31, 2018
Cost of revenue		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%
Research and development		0.6			1.2			0.9			1.3			0.9			1.8			1.6			1.6			0.7			1.8
Sales and marketing		0.9			2.2			1.1			1.5			1.0			2.0			1.7			1.8			0.8			2.2
General and administrative		0.4			1.0			0.7			0.6			0.5			0.9			0.9			1.0			0.5			1.1
Total stock-based compensation expense		1.9	%		4.4	%		2.8	%		3.5	%		2.3	%		4.8	%		4.3	%		4.5	%		2.0	%		5.1	%

(2) Adjusted EBITDA margin is a financial measure that is not calculated in accordance with U.S. GAAP. See the section titled “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures.”

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Quarterly Trends and Seasonality

Our overall operating results fluctuate from quarter to quarter as a result of a variety of factors, including seasonality of our business and the economic cycles that influence consumer retail purchasing decisions. Additionally, new product introductions have an impact on the comparability of our quarterly results year over year, as new products have a positive impact on our revenue in the quarters following launch and may reduce our gross margin as new products gain a larger share of our overall product mix. New product launches are also accompanied by higher levels of sales and marketing expenses. Consequently, the results of any prior quarterly or annual periods should not be relied upon as indications of our future operating performance.

Revenue

On a quarterly basis, our revenue increased year over year in each period presented. These increases were driven by increases in the number of products sold from period to period. Our revenue has historically been subject to seasonality, with higher revenue in the first quarter of our fiscal year, coinciding with increased consumer spending patterns during the holiday shopping season, followed by a seasonal decrease in revenue in the next fiscal quarter.

Cost of Revenue and Gross Profit

On a quarterly basis, our cost of revenue increased year over year in each period presented. These increases were primarily due to the increase in number of products sold, partially offset by a decrease of per unit production costs resulting from supply chain improvement initiatives.

Our quarterly gross profit increased on a year over year basis, with the exception of the three months ended March 31, 2018. These increases were primarily due to the reduction of per unit production costs. We also experience seasonality in our cost of revenue as our promotional discounting activity is higher in the first fiscal quarter, which negatively impacts gross margin during this period. The 3.6 percentage point decrease in gross margin for the three months ended March 31, 2018 compared to the three months ended April 1, 2017 was due to the impact of lower margins on wireless speakers as we launched Sonos One in October 2017, as well as lower retail prices on our older wireless speakers.

Operating Expenses

Quarterly operating expenses have varied over the periods presented as a result of changes in investments in our operations and personnel as well as fluctuations in spending on advertising and other marketing initiatives focused on brand awareness and the launch of our PLAYBASE product in April 2017 and new Sonos One product in October 2017. The decrease in expenses for the three months ended July 2, 2016 was primarily due to decreases in digital marketing and external advertising, as well as a reduction in headcount.

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Non-GAAP Financial Measures

The following table presents a reconciliation of net income (loss) to adjusted EBITDA:

	Three Months Ended
	Jan. 2, 2016			Apr. 2, 2016			July 2, 2016			Oct. 1, 2016			Dec. 31, 2016			Apr. 1, 2017			July 1, 2017			Sept. 30, 2017			Dec. 30, 2017			Mar. 31, 2018
	(in thousands)
Net income (loss)	$	10,544		$	(29,933	)	$	(5,386	)	$	(13,438	)	$	35,017		$	(19,790	)	$	(14,539	)	$	(14,906	)	$	45,697		$	(32,592	)
Depreciation		9,119			8,548			8,793			7,863			7,722			7,824			8,901			10,567			9,546			9,341
Stock-based compensation expense		7,084			7,293			5,050			6,536			8,737			8,686			9,538			9,589			9,537			9,528
Interest expense, net		555			242			893			800			857			1,144			1,185			1,074			1,166			1,085
Other (income) expense, net		3,157			(1,825	)		1,189			(314	)		2,217			(1,289	)		(2,975	)		(1,314	)		(622	)		(2,808	)
Provision for (benefit from) for income taxes		985			420			746			492			(2,088	)		62			196			(461	)		32			601
Adjusted EBITDA	$	31,444		$	(15,255	)	$	11,285		$	1,939		$	52,462		$	(3,363	)	$	2,306		$	4,549		$	65,356		$	(14,845	)
Revenue	$	369,184		$	164,229		$	181,467		$	186,404		$	372,807		$	182,546		$	223,078		$	214,095		$	468,950		$	186,720
Adjusted EBITDA margin		8.5	%		(9.3	)%		6.2	%		1.0	%		14.1	%		(1.8	)%		1.0	%		2.1	%		13.9	%		(8.0	)%

Liquidity and Capital Resources

Since our founding in 2002, our operations have been financed primarily through cash flow from operating activities, borrowings under our credit facilities and net proceeds from the sale of our equity securities. As of March 31, 2018, our principal sources of liquidity consisted of cash flow from operating activities, cash and cash equivalents of $117.8 million, including $16.5 million held by our foreign subsidiaries, and borrowing capacity under our credit facility. In accordance with our policy, the undistributed earnings of our non-U.S. subsidiaries remain indefinitely reinvested outside of the United States as of March 31, 2018, as they are required to fund needs outside the United States. In the event funds from foreign operations are needed to fund operations in the United States and if U.S. tax has not already been previously provided, we may be required to accrue and pay additional U.S. taxes in order to repatriate these funds.

We believe our existing cash and cash equivalent balances, cash flow from operations and committed credit lines will be sufficient to meet our working capital and capital expenditure needs for at least the next 24 months. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending on research and development efforts and other business initiatives, the expansion of sales and marketing activities, the timing of new product introductions, market acceptance of our products and overall economic conditions. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations.

Credit Facilities

Credit Facility

In October 2015, we entered into a credit agreement with J.P. Morgan Chase Bank, N.A., or the 2015 Credit Facility. The 2015 Credit Facility allows us to borrow up to $80.0 million, including up to $10.0 million for the issuance of letters of credit and up to $8.0 million for swing line loans. In connection with the 2015 Credit Facility, we incurred costs of $0.6 million which were recorded as an asset and amortized over the term of the agreement as interest expense. Borrowings under the 2015 Credit Facility may be drawn as Commercial Bank Floating Rate loans, or CBFR Borrowings, or Eurocurrency loans, or Eurocurrency Borrowings, and mature in

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October 2020. CBFR Borrowings bear interest at a variable rate equal to the highest of (i) the prime rate or (ii) adjusted LIBOR plus 2.5%, minus the applicable margin, but in any case at a minimum rate of 1.25% per annum. Eurocurrency Borrowings bear interest at a variable rate based on the LIBOR plus the applicable margin. We are also required to pay an annual commitment fee on the average daily unused portion of the facility of 0.2%, based on the usage of the facility. We have the option to repay the borrowings under the 2015 Credit Facility without penalty prior to maturity. The 2015 Credit Facility requires us to comply with certain financial covenants, including requiring us to maintain a consolidated fixed charge coverage ratio of not less than 1.0, and nonfinancial covenants. As of March 31, 2018, we were in compliance with all covenants. Obligations under the credit facility are collateralized by our eligible inventory and accounts receivable. As of October 1, 2016, September 30, 2017 and March 31, 2018, there were no outstanding borrowings, and $3.8 million, $4.4 million and $4.5 million, respectively, in undrawn letters of credit that reduce that availability under the 2015 Credit Facility.

Term Loan

In March 2016, we entered into a $25.0 million, five-year term loan agreement with Gordon Brothers Finance Company, or the Term Loan. The Term Loan initially bore interest at a variable rate equal to an adjusted LIBOR plus 10.0%, with a minimum rate of 10.5% per annum. In December 2016, we amended the Term Loan, or, as amended, the Amended Term Loan, to increase the principal amount under the Term Loan by $15.0 million, to a total of $40.0 million, reduce the interest rate to a variable rate equal to an adjusted LIBOR plus 9.5% and change the prepayment penalty terms. We received net proceeds of $39.2 million, net of $0.8 million of debt issuance costs. The debt issuance costs are included in the carrying value of the Amended Term Loan as a debt discount. The effective interest rate on the Amended Term Loan was 10.5%, 10.7% and 11.2% as of October 1, 2016, September 30, 2017 and March 31, 2018, respectively.

The Amended Term Loan requires us to comply with certain financial covenants, including requiring us to maintain a consolidated fixed charge coverage ratio of not less than 1.0 and requiring us to maintain a minimum liquidity reserve of $38.5 million, and nonfinancial covenants. As of October 1, 2016, September 30, 2017 and March 31, 2018, we were in compliance with all covenants. Obligations under the Amended Term Loan are collateralized by our eligible inventory, accounts receivable and intellectual property.

The carrying value of the Amended Term Loan was $24.5 million, $39.6 million and $39.7 million, net of unamortized debt discount of $0.5 million, $0.4 million and $0.3 million, as of October 1, 2016, September 30, 2017 and March 31, 2018, respectively.

There is a $40.0 million principal payment due on March 30, 2021 at which time the Amended Term Loan will be fully repaid. No principal payments are required to be made during fiscal 2017 through fiscal 2020. We can prepay the Amended Term Loan subject to an early termination fee. For prepayments made prior to March 30, 2019, the early termination fee is 1% of the prepayment amount. There is no early termination fee for prepayments made after March 30, 2019.

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Cash Flows

The following table summarizes our cash flows for the periods indicated:

	Fiscal Year Ended									Six Months Ended
	Oct. 3, 2015			Oct. 1, 2016			Sept. 30, 2017			April 1, 2017			March 31, 2018
	(in thousands)
Net cash provided by (used in):
Operating activities	$	38,665		$	43,294		$	63,960		$	60,720		$	4,587
Investing activities		(65,517	)		(52,520	)		(33,553	)		(12,424	)		(21,870	)
Financing activities		35,379			7,969			23,955			19,078			2,276
Effect of exchange rate changes		(2,788	)		(182	)		1,320			(385	)		2,216
Net change in cash and cash equivalents	$	5,739		$	(1,439	)	$	55,682		$	66,989		$	(12,791	)

Cash Flows from Operating Activities

Net cash provided by operating activities of $4.6 million for the six months ended March 31, 2018 was primarily due to net income of $13.1 million, non-cash adjustments of $36.2 million and a net decrease in cash related to changes in operating assets and liabilities of $44.7 million. Non-cash adjustments primarily consisted of stock-based compensation of $19.1 million and depreciation of $18.9 million. The net decrease in operating assets and liabilities was primarily due to a $75.7 million decrease in accounts payable and accrued expenses due to the timing of payments, a $9.3 million decrease in accrued compensation due to the payment of bonuses in the first quarter of fiscal 2018, partially offset by a $28.0 million decrease in inventory due to seasonality, and a decrease in accounts receivable of $12.1 million due to the collection of holiday sales. Our days sales outstanding in accounts receivable, calculated as the number of days of period revenue represented by the accounts receivable balance as of period end, decreased from 17 days as of September 30, 2017 to 10 days as of March 31, 2018 due to seasonal sales in the first quarter of fiscal 2018 and higher collections in the second quarter of fiscal 2018.

Net cash provided by operating activities of $60.7 million for the six months ended April 1, 2017 was primarily due to net income of $15.2 million, non-cash adjustments of $34.6 million and a net increase in cash related to changes in operating assets and liabilities of $10.9 million. Non-cash adjustments primarily consisted of stock-based compensation expense of $17.4 million and depreciation of $15.5 million. The net increase in cash related to changes in operating assets and liabilities was primarily due to a $15.7 million decrease in inventory due to seasonality and a $13.3 million increase in deferred revenue, primarily related to the sell in of PLAYBASE in advance of the general availability date. The net increase in cash related to changes in operating assets and liabilities was partially offset by a $13.8 million decrease in accounts payable and accrued expenses due to the timing of payments. Our days sales outstanding in accounts receivable, calculated as the number of days of period revenue represented by the accounts receivable balance as of period end, decreased from 18 days as of October 1, 2016 to 12 days as of April 1, 2017 due to seasonal sales in the first quarter of fiscal 2017 and higher collections in the second quarter of fiscal 2017.

Net cash provided by operating activities of $64.0 million for fiscal 2017 was primarily due to net loss of $14.2 million, non-cash adjustments of $70.2 million and an increase in net change in operating assets and liabilities of $8.0 million. Non-cash adjustments primarily consisted of stock-based compensation expense of $36.6 million and depreciation of $35.0 million. The increase in net change in operating assets and liabilities was primarily due to a $60.0 million increase in accounts payable and accrued expenses related to amounts owed to our contract manufacturer and various other vendors, and a $9.4 million increase in deferred revenue. The increase in net change in operating assets and liabilities was offset by a $60.3 million increase in inventory as we prepared for the holiday shopping season, which occurred in our first quarter of fiscal 2018. This inventory also includes the initial production of our new wireless speaker, Sonos One, as we prepared for product launch in October 2017. An increase of $2.7 million in accounts receivable also offsets the increase in net change in operating assets and liabilities. Our days sales outstanding in accounts receivable, calculated as the number of

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days of annual revenue represented by the accounts receivable balance as of period end, decreased from 18 days as of October 1, 2016 to 17 days as of September 30, 2017.

Net cash provided by operating activities of $43.3 million for fiscal 2016 was primarily due to net loss of $38.2 million, non-cash adjustments of $64.3 million and an increase in net change in operating assets and liabilities of $17.2 million. Non-cash adjustments primarily consisted of depreciation of $34.3 million and stock-based compensation expense of $26.0 million. The increase in net change in operating assets and liabilities was primarily due to an increase in deferred revenue of $8.6 million, an increase in other liabilities of $8.1 million primarily related to tenant improvement allowances received for our office and lab facilities, a $5.9 million decrease in inventory and a decrease of other assets of $2.9 million. The increase in net change in operating assets and liabilities was offset by increases in accounts receivable of $4.6 million, as well as a decrease in accounts payable and accrued expenses of $3.6 million. Our days sales outstanding in accounts receivable remained flat at 18 days as of October 3, 2015 and October 1, 2016.

Net cash provided by operating activities of $38.7 million for fiscal 2015 was primarily due to net loss of $68.8 million, non-cash adjustments of $63.5 million and an increase in net change in operating assets and liabilities of $43.9 million. Non-cash adjustments primarily consisted of depreciation of $27.9 million and stock-based compensation expense of $23.3 million. The increase in net change in operating assets and liabilities was primarily due to an increase in accounts payable and accrued expenses of $55.5 million related to amounts owed to our contract manufacturer and various other vendors, an increase in deferred revenue of $11.4 million, and an increase in other liabilities of $5.0 million primarily related to tenant improvement allowances received for our office and lab facilities. The increase in net change in operating assets and liabilities was offset by an increase of $16.0 million in inventory as we prepared for the launch of our second-generation PLAY:5 wireless speaker, increases in accounts receivable of $7.2 million, as well as an increase in other assets of $4.8 million primarily related to prepaid expenses. Our days sales outstanding in accounts receivable decreased from 19 days as of September 27, 2014 to 18 days as of October 3, 2015.

Cash Flows from Investing Activities

Cash used in investing activities for the six months ended March 31, 2018 of $21.9 million was due to payments for property and equipment, which primarily comprised of marketing-related purchases predominantly for product displays and manufacturing-related tooling and test equipment used at our contract manufacturers to support the launch of new products.

Cash used in investing activities for the six months ended April 1, 2017 of $12.4 million was due to payments for property and equipment, which primarily comprised of marketing-related product displays, and investments in office and lab facilities, lab equipment and related information technology tools.

Cash used in investing activities for fiscal 2017 of $33.6 million was due to payments for property and equipment, which primarily comprised of marketing-related purchases of $18.7 million, predominantly for product displays, $11.3 million in manufacturing-related tooling and test equipment used at our contract manufacturers to support the launch of new products and the remainder invested in office and lab facilities, lab equipment and related information technology tools.

Cash used in investing activities for fiscal 2016 of $52.5 million was due to payments for property and equipment which primarily comprised of marketing-related purchases of $13.4 million, predominantly for product displays and our concept store in New York City, and $4.2 million in manufacturing-related tooling and test equipment used at our contract manufacturers to support the launch of new products. In addition, we invested $31.1 million in upgrading and expanding our office and lab facilities, lab equipment and related information technology tools. We expect that this build out of new facilities over fiscal 2015 and fiscal 2016 will support our anticipated growth.

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Cash used in investing activities for fiscal 2015 of $65.5 million was due to payments for property and equipment primarily comprised of marketing-related purchases of $14.7 million, predominantly for product displays and $15.4 million in manufacturing-related tooling and test equipment used at our contract manufacturers to support the launch of new products. In addition, we invested $30.8 million in upgrading and expanding our office and lab facilities, lab equipment and related information technology tools.

Cash Flows from Financing Activities

Cash provided by financing activities for the six months ended March 31, 2018 of $2.3 million primarily consisted of net proceeds of $30.0 million from revolving credit facilities and proceeds from the exercise of common stock options of $4.4 million. These increases were offset by a net paydown of our revolving credit facilities of $30.0 million, payment of offering costs of $1.3 million, and $0.8 million to repurchase common stock to provide liquidity for existing equityholders.

Cash provided by financing activities for the six months ended April 1, 2017 of $19.1 million primarily consisted of net proceeds of $15.0 million from revolving credit facilities, and proceeds from the exercise of common stock options of $12.9 million. These increases were offset by $8.8 million related to the repurchase common stock to provide liquidity for existing equityholders.

Cash provided by financing activities for fiscal 2017 of $24.0 million primarily consisted of a $15.0 million increase in the principal amount of our existing term loan, $10.1 million in proceeds from issuance of common stock, net of issuance costs, and proceeds from the exercise of common stock options of $8.9 million. These increases were offset by $10.0 million to repurchase common stock to provide liquidity for existing equityholders.

Cash provided by financing activities for fiscal 2016 of $8.0 million primarily related to the net proceeds from the issuance of a new term loan debt of $24.4 million and proceeds from the exercise of common stock options of $3.7 million. This increase was offset by a net paydown of our revolving credit facilities of $20.0 million.

Cash provided by financing activities for fiscal 2015 of $35.4 million primarily consisted of $129.9 million proceeds from the issuance of common stock, net of issuance costs, net proceeds of $20.0 million from revolving credit facilities and proceeds from the exercise of common stock options of $15.5 million. These increases were offset by a $130.0 million repurchase of common stock to provide liquidity for existing equityholders.

Commitments and Contingencies

The following table summarizes our contractual commitments as of September 30, 2017:

	Payments Due by Period
Contractual Obligations	Total		Less than 1 Year		1-2 Years		3-5 Years		More than 5 Years
	(in thousands)
Debt principal and interest(1)	$	55,235	$	3,997	$	4,355	$	4,724	$	42,159
Operating leases(2)		99,228		16,823		15,077		36,942		30,386
Inventory(3)		143,062		143,062		—		—		—
Other noncancelable agreements		12,206		11,131		1,020		55		—
Total contractual commitments	$	309,731	$	175,013	$	20,452