Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. 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 Annual Report on Form 10-K, particularly in the section titled "Risk Factors."
We operate on a 52-week or 53-week fiscal year ending on the Saturday nearest September 30 each year. Our fiscal year is divided into four quarters of 13 weeks, each beginning on a Sunday and containing two 4-week periods followed by a 5-week period. An additional week is included in the fourth fiscal quarter approximately every five years to realign fiscal quarters with calendar quarters. References to fiscal 2025 are to our 52-week fiscal year ended September 27, 2025, references to fiscal 2024 are to our 52-week fiscal year ended September 28, 2024, references to fiscal 2023 are to our 52-week fiscal year ended September 30, 2023 and references to fiscal 2022 are to our 52-week fiscal year ended October 1, 2022.
Key Metrics
In addition to the measures presented in our consolidated financial statements, we use the following key metrics to evaluate our business, measure our performance, identify trends affecting our business and assist us in making operational and strategic decisions. Our key metrics are total revenue, products sold, Adjusted EBITDA and Adjusted EBITDA margin. The most directly comparable financial measure calculated under U.S. GAAP for Adjusted EBITDA and Adjusted EBITDA margin are net loss and net loss margin, respectively.
Fiscal Year Ended
September 27,
September 28,
September 30,
(In thousands, except percentages)
Revenue
Products sold
Net loss
Net loss margin (1)
Adjusted EBITDA (2)
Adjusted EBITDA margin (2)
(1) Net loss margin is calculated by dividing net loss by revenue.
(2) For additional information regarding Adjusted EBITDA and Adjusted EBITDA margin (which are non-GAAP financial measures), including reconciliations of net loss to Adjusted EBITDA, see the sections titled "Adjusted EBITDA and Adjusted EBITDA Margin" and "Non-GAAP Financial Measures" below.
Revenue
We generate substantially all of our revenue from the sale of Sonos speakers and Sonos system products. We also generate a portion of revenue from Partner products and other revenue sources, such as architectural speakers from our Sonance partnership, accessories such as speaker stands and wall mounts, professional services, licensing, and advertising revenue.
For a description of our revenue recognition policies, see the section titled "Critical accounting policies and estimates."
Products Sold
Products sold represents the number of products that are sold during a period, net of returns, and includes the sale of products in the Sonos speakers and Sonos system products categories, as well as architectural speakers and module units sold through our Partner products and other revenue category. 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, the price at which we sell our products, the introduction of new products that may have higher or lower than average selling prices, the impact of foreign exchange fluctuations, as well as the impact of recognition of previously deferred revenue.
Adjusted EBITDA and Adjusted EBITDA Margin
See the section titled "Results of Operations —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 and net income (loss) margin to Adjusted EBITDA margin.
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Non-GAAP Financial Measures
To supplement our consolidated financial statements presented in accordance with U.S. GAAP, we monitor and consider Adjusted EBITDA, Adjusted EBITDA margin, and constant currency 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 and amortization, stock-based compensation expense, interest income, interest expense, other income (expense), income taxes, legal and transaction related costs, restructuring and other charges, and other items that we do not consider representative of underlying operating performance. We define Adjusted EBITDA margin as Adjusted EBITDA divided by revenue.
We also present percentage sales growth in constant currency to show performance unaffected by fluctuations in currency exchange rates. We calculate constant currency growth percentages by translating our current period financial results using the prior period average currency exchange rates and comparing these amounts to our prior period reported results.
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 net income (loss) margin, which is the nearest U.S. GAAP equivalent of Adjusted EBITDA margin. These limitations include that the non-GAAP financial measures:
• exclude depreciation and amortization, and although these are non-cash expenses, the assets being depreciated may be replaced in the future;
• 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;
• do not reflect interest income, primarily resulting from interest income earned on our cash and cash equivalent balances;
• 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;
• do not reflect the effect of foreign currency exchange gains or losses, which is included in other income (expense), net;
• do not reflect the provision for or benefit from income tax that may result in payments that reduce cash available to us;
• do not reflect items that are not considered representative of our underlying operating performance which reduce cash available to us; and
• may not be comparable to similar non-GAAP financial measures used by other companies, because 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.
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The following table presents a reconciliation of net loss to adjusted EBITDA:
Fiscal Year Ended
September 27,
September 28,
September 30,
(In thousands, except percentages)
Net loss
Add (deduct):
Depreciation and amortization
Stock-based compensation expense
Interest income
Interest expense
Other (income) expense, net
Provision for income taxes
Legal and transaction related costs (1)
Restructuring and other charges (2)
Adjusted EBITDA
Revenue
Net loss margin
Adjusted EBITDA margin
(1) Legal and transaction related costs consist of expenses related to our intellectual property ("IP") litigation against Alphabet and Google as well as legal and transaction costs associated with our acquisition activities, which we do not consider representative of our underlying operating performance.
(2) Restructuring and other charges for fiscal 2025 and fiscal 2024, primarily reflect costs associated with our cost transformation initiative including the 2024 restructuring plan, 2025 restructuring plan, rationalization of our product roadmap, and non-recurring costs related to write-offs of assets no longer in use, as well as non-recurring Chief Executive Officer ("CEO") transition costs related to modifications to equity awards. See Note 13. Restructuring and Other Charges in the notes to our consolidated financial statements for further information. Restructuring and other charges fiscal 2023, are primarily related to our 2023 restructuring plan and also costs incurred in March 2023 related to the abandonment of portions of our office spaces.
Comparison of Fiscal Years 2025 and 2024
Revenue
Fiscal Year Ended
Change from Prior Fiscal Year
September 27, 2025
September 28, 2024
(Dollars in thousands)
Sonos speakers
% of total revenue
Sonos system products
% of total revenue
Partner products and other revenue
% of total revenue
Total revenue
Volume data (products sold in thousands)
Units
Total products sold
Total revenue decreased $74.8 million, or 4.9% for fiscal 2025 compared to fiscal 2024, driven by challenges resulting from our app rollout in May 2024 and softer demand due to market conditions, partially offset by the introduction of Arc Ultra in October 2024.
Sonos speakers represented 77.7% of total revenue for fiscal 2025 and decreased 4.1% compared to fiscal 2024, primarily driven by expected declines in Arc and Sonos One, as well as Beam, Move, and Sub Mini. These declines were partially offset by the
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introduction of Arc Ultra, as well as Era 100. Sonos system products represented 17.3% of total revenue for fiscal 2025 and decreased 6.9% compared fiscal 2024. Partner products and other revenue represented 5.0% of total revenue for fiscal 2025, and decreased 10.5% compared to fiscal 2024.
The volume of products sold decreased 7.5% for fiscal 2025, compared to fiscal 2024.
Revenue by Region
Fiscal Year Ended
September 27, 2025
Change (%)
Constant Currency Change (%) (1)
Americas
Europe, Middle East and Africa
Asia Pacific
(1) Constant currency is a financial measure that is not calculated in accordance with U.S. GAAP. For additional information, see the section titled "Non-GAAP Financial Measures" above.
Cost of Revenue and Gross Profit
Fiscal Year Ended
Change from Prior Fiscal Year
September 27, 2025
September 28, 2024
(Dollars in thousands)
Cost of revenue
Gross profit
Gross margin
Cost of revenue consists of product costs, including costs of our contract manufacturers for production, components, shipping and handling, tariffs, duty costs, warranty replacement costs, packaging, fulfillment costs, manufacturing and tooling equipment depreciation, warehousing costs, hosting costs, and excess and obsolete inventory write-downs. It also includes licensing costs, such as royalties to third parties, and amortization attributable to acquired developed technology. In addition, we allocate certain costs related to management and facilities, personnel-related expenses, and supply chain logistic costs. Personnel-related expenses consist of salaries, bonuses, benefits, and stock-based compensation expenses.
Cost of revenue decreased $15.9 million, or 1.9%, for fiscal 2025 compared to fiscal 2024, primarily due to a decrease in product and material costs as well as decrease in products sold, partially offset by the impact of reorganization efforts, and increased amortization primarily related to the completion of our Mayht in-process research and development project and related reclassification into finite-lived intangible assets.
Gross margin decreased approximately 170 basis points for fiscal 2025 compared to fiscal 2024. The decrease was primarily due to the impact of reorganization efforts, unfavorable channel mix, and increased amortization primarily related to the completion of our Mayht in-process research and development project and related reclassification into finite-lived intangible assets, partially offset by decreased product and material costs.
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Operating Expenses
Fiscal Year Ended
Change from Prior Fiscal Year
September 27, 2025
September 28, 2024
(Dollars in thousands)
Research and development
Less restructuring and other charges (1)
Research and development, net of restructuring and other charges
Sales and marketing
Less restructuring and other charges (1)
Sales and marketing, net of restructuring and other charges
General and administrative
Less restructuring and other charges (1)
General and administrative, net of restructuring and other charges
Operating expenses
Less restructuring and other charges (1)
Operating expenses, net of restructuring and other charges
(1) Restructuring and other charges for fiscal 2025 and fiscal 2024 primarily reflect costs associated with our cost transformation initiatives including the 2024 restructuring plan, 2025 restructuring plan, rationalization of our product roadmap, and non-recurring costs related to write-offs of assets no longer in use, as well as non-recurring CEO transition costs related to modifications to equity awards. See Note 13. Restructuring and Other Charges in the notes to our consolidated financial statement for further information.
Research and Development
Research and development expenses consist primarily of personnel-related expenses, third-party resources expenses, tooling, test equipment, prototype materials, and related 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.
Research and development expenses excluding restructuring and other charges decreased $31.4 million, or 10.5%, for fiscal 2025 compared to fiscal 2024. This decrease was primarily driven by lower personnel-related costs due to lower headcount and our reorganization efforts, partially offset by higher variable compensation costs.
Sales and Marketing
Sales and marketing expenses consist primarily of advertising and marketing activity for our products and personnel-related expenses, maintenance and repair expenses for product displays, as well as related depreciation, customer experience expenses, revenue related sales fees from our direct-to-consumer and installer solutions sales channels, and related overhead costs.
Sales and marketing expenses excluding restructuring and other charges decreased $16.4 million, or 5.7%, for fiscal 2025 compared to fiscal 2024. This decrease was primarily driven by lower marketing costs compared to prior year when we incurred significant costs associated with our launch of Sonos Ace in June 2024 marking our entry into the headphones market, partially offset by increased depreciation costs associated with our product displays.
General and Administrative
General and administrative expenses consist of administrative personnel-related expenses for our information technology, finance, legal, human resources, and similar personnel, as well as the costs of professional services, information technology, litigation, patents, related overhead, and other administrative expenses.
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General and administrative expenses excluding restructuring and other charges decreased $26.8 million, or 19.3%, for fiscal 2025 compared to the fiscal 2024. This decrease was primarily driven by lower personnel-related costs, professional fees and information technology costs as a result of lower headcount and our cost transformation efforts.
Interest Income, Interest Expense, and Other Income (Expense), Net
Fiscal Year Ended
Change from Prior Fiscal Year
September 27, 2025
September 28, 2024
(Dollars in thousands)
Interest income
Interest expense
Other income (expense), net
Total other income (expense), net
Interest income consists primarily of interest income earned on our cash, cash equivalents, and marketable securities balances. Interest expense consists primarily of interest expense associated with our debt financing arrangements and amortization of debt issuance costs. 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.
Interest income for fiscal 2025 compared to fiscal 2024 decreased primarily due to lower yields on our cash and cash equivalents combined with lower average cash balances. Interest expense for fiscal 2025, compared to fiscal 2024, increased primarily due to increased bank fees. The increase in other income (expense), net for fiscal 2025, compared to fiscal 2024, was primarily due to non-cash foreign currency exchange fluctuations.
Provision for Income Taxes
Fiscal Year Ended
Change from Prior Fiscal Year
September 27, 2025
September 28, 2024
(Dollars in thousands)
Provision for income taxes
Provision for income taxes for fiscal 2025, compared to fiscal 2024, decreased slightly primarily due to a reduction in the amount of net expense subject to capitalization under Section 174 of the U.S. Internal Revenue Code and a reduction in operating income. The decrease was partially offset by the non-recurrence of favorable tax impacts recognized in fiscal 2024 related to a Dutch Innovation Box ruling and the revaluation of certain Dutch deferred tax liabilities related to an intercompany sale of intellectual property to the U.S.
On July 4, 2025, H.R. 1, commonly referred to as the One Big Beautiful Bill Act (“OBBBA”), was enacted. The legislation includes provisions such as accelerated cost recovery of qualified property, immediate expensing of U.S.-based research and development costs, and changes to the U.S. international taxation regime. We are continuing to assess the potential impacts of the OBBBA on our future operations and effective tax rate. Based on preliminary analyses, certain provisions are expected to significantly reduce our U.S. income tax expense in fiscal 2026. Actual impacts will depend on future regulatory guidance our ongoing evaluation of the legislation.
Comparison of Fiscal Years 2024 and 2023
For the comparison of fiscal years 2024 and 2023, refer to Part II, Item 7 "Management's discussion and analysis of financial condition and results of operations" on Form 10-K for fiscal 2024, filed with the SEC on November 15, 2024, under the subheading "Comparison of fiscal years 2024 and 2023."
Liquidity and Capital Resources
Our operations are financed primarily through cash flows from operating activities. As of September 27, 2025, our principal sources of liquidity consisted of cash flows from operating activities, cash and cash equivalents of $174.7 million, including $105.5 million held by our foreign subsidiaries, marketable securities of $52.9 million, proceeds from the exercise of stock options, and borrowing capacity under the 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 September 27, 2025, as they are required to fund needs
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outside of 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 paid, we may be required to accrue and pay additional U.S. taxes to repatriate these funds.
We believe our existing cash and cash equivalent balances, cash flows from operations, and committed credit lines will be sufficient to meet our long-term working capital and capital expenditure needs for at least the next 12 months. We hold our cash with a diverse group of major financial institutions and have processes and safeguards in place to manage our cash balances and mitigate the risk of loss. In October 2021, we entered into the Revolving Credit Agreement, which allows us to borrow up to $100 million, with a maturity date of October 2026. In October 2025, we amended the Revolving Credit Agreement. See Note 14. Subsequent Event of the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further details. 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, our planned sales and marketing activities, the timing of new product introductions, our potential merger and acquisition activity, market acceptance of our products, and overall economic conditions. To the extent that current and anticipated 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 increased dilution to our stockholders. If we were to incur additional debt financing it would result in increased debt service obligations and the instruments governing such debt could require additional operating and financing covenants that would restrict our operations.
Debt Obligations
On October 13, 2021, we entered into a Revolving Credit Agreement with JPMorgan Chase Bank, N.A., as the administrative agent, and Bank of America N.A., Morgan Stanley Senior Funding, Inc., and Goldman Sachs Bank USA as the other lenders party thereto (the "Revolving Credit Agreement"). The Revolving Credit Agreement provided for (i) a five year senior secured revolving credit facility in the amount of up to $100 million and (ii) an uncommitted incremental facility subject to certain conditions. Proceeds are to be used for working capital and general corporate purposes. In June 2023, we amended our Revolving Credit Agreement to change the reference rate from LIBOR to the Secured Overnight Financing Rate (“SOFR”), effective July 1, 2023. The facility may be drawn as an Alternative Base Rate Loan (at 1.00% plus an applicable margin) or Term Benchmark Loan (SOFR plus an applicable margin). We must also pay (i) an unused commitment fee ranging from 0.200% to 0.275% per annum of the average daily unused portion of the aggregate revolving credit commitment under the agreement and (ii) a per annum fee equal to the applicable margin over SOFR multiplied by the aggregate face amount of outstanding letters of credit. As of September 27, 2025, we did not have outstanding borrowings and $2.4 million in undrawn letters of credit that reduce the availability under the Revolving Credit Agreement.
Our obligations under the Revolving Credit Agreement are secured by substantially all of our assets. The Revolving Credit Agreement contains customary representations and warranties, customary affirmative and negative covenants, a financial covenant that is tested quarterly and requires us to maintain a certain consolidated leverage ratio, and customary events of default. As of September 27, 2025, we were in compliance with all financial covenants under the Revolving Credit Agreement.
In October 2025, we amended the Revolving Credit Agreement. See Note 14. Subsequent Event of the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further details.
Cash Flows
Fiscal 2025 Changes in Cash Flows
The following table summarizes our cash flows for the periods indicated:
Fiscal Year Ended
(In thousands)
September 27, 2025
September 28, 2024
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes
Net increase (decrease) in cash and cash equivalents
Cash Flows from Operating Activities
Net cash provided by operating activities of $136.9 million for fiscal 2025 consisted of a net loss of $61.1 million, non-cash adjustments of $170.1 million, and a favorable impact of net changes in operating assets and liabilities of $27.9 million. Non-cash adjustments primarily consisted of stock-based compensation expense, depreciation and amortization, and non-cash restructuring charges. The net increase in cash from the change in operating assets and liabilities was primarily due to a decrease in inventories of
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$51.7 million as the result of measures taken to more efficiently manage inventory, a decrease in other assets of $10.5 million, and an increase in accrued compensation of $5.2 million. The net increase in cash from the change in operating assets and liabilities was partially offset by an increase in accounts receivable of $21.9 million, and a decrease in accounts payable and accrued expenses of $14.4 million due to lower inventory purchases.
Cash Flows from Investing Activities
Cash used in investing activities of $29.5 million for fiscal 2025, primarily consisted of the purchases of marketable securities of $57.9 million, and purchases of property and equipment of $28.7 million mainly related to point-of-sale product displays, manufacturing-related tooling and test equipment to support the launch of new products, and leasehold improvements, partially offset by cash provided by maturities of marketable securities of $57.1 million.
Cash Flows from Financing Activities
Cash used in financing activities of $102.3 million for fiscal 2025, primarily consisted of payments for repurchase of common stock of $81.0 million and payments for repurchase of common stock related to shares withheld for tax in connection with vesting of stock awards of $25.9 million, partially offset by proceeds from the exercise of options of $4.5 million.
Fiscal 2024 Changes in Cash Flows
For the comparison of fiscal 2024 to fiscal 2023, refer to Part II, Item 7 "Management's discussion and analysis of financial condition and results of operations" of our Form 10-K for fiscal 2024, filed with the SEC on November 15, 2024, under the subheading "Liquidity and capital resources."
Contractual obligations
See Note 6. Leases and Note 12. Commitments and Contingencies of the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further details.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates.
Our critical accounting policies requiring estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below.
Revenue
Nature of Products and Services
We generate substantially all of our revenue from the sale of Sonos speakers and Sonos system products. We also generate a portion of revenue from partner products and other revenue sources, such as architectural speakers from our Sonance partnership, and accessories such as speaker stands and wall mounts, as well as professional services, advertising revenue, licensing and subscription revenue.
Our contracts generally include a combination of products and related software, and services. Products and related software primarily constitute Sonos speakers and Sonos system products and include software that enables our products to operate over a customer’s wireless network as well as connect to various third-party services, including music and voice. Additionally, module revenue includes hardware and embedded software that is integrated into final products that are manufactured and sold by our partners. Service revenue includes revenue allocated to (i) unspecified software upgrades and (ii) cloud-based services that enable products to access third-party music and voice assistant platforms. Unspecified software upgrades have historically included updates and enhancements such as bug fixes, feature enhancements and updates to the ability to connect to third-party music or voice assistant platforms.
Performance Obligations
Determining whether products and services are considered distinct performance obligations that should be accounted for separately requires significant judgment. We have determined that products and related software represent a single performance obligation. The basis of our determination is these products are highly dependent on, and interrelated with, the embedded software and cannot function as they are intended without the software.
We determined that unspecified software upgrades represent a separate performance obligation as they occur subsequent to the time of purchase, fulfillment of these promises can be made separately, there are no resulting significant modification or
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customization to our products, and these services are provided to customers at no additional charge. We have also determined cloud-based services to be a separate performance obligation as they are additive to our products rather than transformative.
Transaction price
Revenue is recognized at transaction price which is the amount that we expect to receive in exchange for our products and services. Transaction price is calculated as the stated consideration net of variable consideration such as allowances for returns, discounts, sales incentives, and any tax collected from customers. The transaction price is allocated to the separate performance obligations in the contract based on relative standalone selling prices ("SSPs").
We estimate SSP for items that are not sold separately, which include the products and related software, unspecified software upgrades and cloud services, using information that may include competitive pricing information, where available, as well as analysis of the cost of providing the products or services plus a reasonable margin. In developing SSP estimates, we also consider the nature of the products and services and the expected level of future services.
We offer sales incentives through various programs, consisting primarily of discounts, cooperative advertising and market development fund programs. Reductions in revenue related to discounts are allocated to products and services on a relative basis based on their respective SSP. Estimates for sales incentives are developed using the most likely amount based on our past experience with similar contracts and are included in the transaction price to the extent that a significant reversal of revenue would not result once the uncertainty is resolved.
We accept returns from direct customers and from certain resellers. To establish an estimate for returns, we use the expected value method by considering a portfolio of contracts with similar characteristics to calculate the historical returns rate.
A change in contract, future business initiatives, or customer behavior due to macroeconomic conditions could require us to change the above estimates, or if actual results differ significantly from the estimates, we would be required to increase or reduce revenue to reflect the impact.
Revenue Recognition
Revenue is allocated to products and related software, and to unspecified software upgrades and cloud-based services. Revenue allocated to the products and related software is the substantial portion of the total sale price. Revenue for products and related software is recognized at the point in time when control is transferred to the customer, which is either upon shipment or upon delivery to the customer, depending on delivery terms.
Revenue allocated to unspecified software upgrades and cloud-based services is deferred and recognized ratably over our best estimate of the period that the customer is expected to receive the services. Determining the revenue recognition period for unspecified software upgrades and cloud services requires judgment. In developing the estimated period of providing future services, we consider our past history, our plans to continue to provide services, including plans to continue to support updates and enhancements to prior versions of our products, expected technological developments, obsolescence, competition and other factors. The estimated service period may change in the future in response to competition, technology developments and our business strategy.
For fiscal 2025, there has not been any event that would require us to materially change the underlying assumptions of revenue estimates. A hypothetical 10% change to our SSP estimates and/or the estimated recognition period for unspecified software upgrades and cloud-based services, would not result in a material change to our fiscal 2025 revenue.
Inventories
Inventory consists of finished goods and component parts, which we purchase from contract manufacturers and component suppliers. We record and value our inventory at the lower-of-cost and net realizable value. We determine cost using a standard costing method, which approximates first-in first-out. On a quarterly basis, we assess the value of our inventory on hand and non-cancelable purchase commitments for potential excess and/or obsolete inventory and will periodically write down the value to account for estimated excess and/or obsolete inventory. We determine excess or obsolete inventory based on market conditions, age/condition of inventory, an estimate of the future demand for our products within a specified time horizon, generally the shorter of 24 months or remaining life of the product, and product life cycle status. Inventory write-downs and losses on purchase commitments are recorded as a component of cost of revenue in our consolidated statement of operations and comprehensive loss. If actual demand is lower than our forecasted demand, we could be required to write down the value of additional inventory, which would have a negative effect on our gross profit. A hypothetical 10% change to our inventory reserves percentages would not result in a material change to our fiscal 2025 cost of revenue.
Income Taxes
Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect our best estimate of current and future taxes to be paid. Significant judgments and estimates are required in the determination of the consolidated income tax expense.
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We prepare and file income tax returns based on our interpretation of each jurisdiction’s tax laws and regulations. In preparing our consolidated financial statements, we estimate our income tax liability in each of the jurisdictions in which we operate by estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. Significant management judgment is required in assessing the realizability of our deferred tax assets. In performing this assessment, we consider whether it is "more-likely-than-not" that some portion or all the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In making this determination, we consider the scheduled reversal of deferred tax liabilities, projected future taxable income and the effects of tax planning strategies. We recorded a valuation allowance against all our U.S. deferred tax assets as of September 27, 2025. We intend to continue maintaining a full valuation allowance on our U.S. deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances.
We account for uncertain tax positions using a "more-likely-than-not" threshold for recognizing and resolving uncertain tax positions. We evaluate uncertain tax positions on a quarterly basis and consider various factors, that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, information obtained during in process audit activities and changes in facts or circumstances related to a tax position. We accrue for potential interest and penalties related to unrecognized tax benefits in income tax expense. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in our income tax expense in the period in which we make the change, which could have a material impact on our effective tax rate and operating results.
Our policy with respect to the undistributed earnings of our non-U.S. subsidiaries is to maintain an indefinite reinvestment assertion as they are required to fund needs outside of the United States. This assertion is made on a jurisdiction by jurisdiction basis and takes into account the liquidity requirements in both the United States and of our foreign subsidiaries.
