Sonic Innovations issued its first-quarter earnings release a few days ago, and this weekend I finally listened to the webcast of CFO Stephen Wilson’s conference call with financial analysts. The bad news is that sales are down two percent from last year’s record first quarter. At first glance it looks like an indicator of weak demand and flat sales generally in an industry that should be seeing healthy growth from consumers whose need for hearing assistance is constantly growing. But Sonic Innovations is betting heavily on its new Innova line of hearing aids, which it didn’t introduce until early April after the fiscal quarter ended. Innova features a directional microphone for hearing conversation in noisy environments that the company says is nearly twice as effective as its competitors’. And as a strong entry in the high-end behind-the-ear (BTE) market, Innova will help boost the company’s sales in Europe, where Wilson says more than 70 percent of the market prefers BTE aids. And there is additional silver lining in the results.
Wilson blamed the revenue decline on competive pressure from the many products other manufacturers are launching, leading to lower retail prices in the market and aggressive incentives that the company had to offer its resellers. So while he didn’t specify volumes, clearly there is demand in the marketplace and the companies are selling a lot of product, but lower prices are making it harder to see the revenue increases they’d like. Therefore the good news is that more competition and lower prices will only make it easier for people who need hearing aids to get them, which will ultimately result in higher volumes of hearing aid sales and stronger financial results for the manufacturers who are careful about controlling costs in their business.
I like Sonic Innovations because it is aggressively experimenting with new channel and delivery models through its acquisition of Tympany and its Otogram product that will enable regular primary care physicians to easily diagnose hearing loss and recommend a hearing aid much earlier in the purchase cycle than ever before. The Tympany acquisition and Sonic Innovations’ new “Hearing Health Network” are the kinds of innovations the industry needs. Unfortunately, innovating is expensive work, so Sonic Innovations’ earnings declined even more steeply in the quarter than its sales. But if the payoff is higher sales and larger market share in the future, the investments will be worth it. Especially if it means more people who need hearing assistance get it.