TOP CONTRIBUTORS

Tom Park

www.zacks.com

SNCI AT A GLANCE

P/E ► -1.14   EV/EBITDA ► -2.08   ROA ► -20.2% AVG ROE ► -35.6% AVG Debt to Equity ► 0.799 AVG Current Ratio ► 1.31 LOW Interest Coverage Ratio ► -20.7 AVG

 

 

 

 

 

 

Sonic Innovations designs, develops, manufactures, and markets advanced digital hearing aids, designed to provide the highest levels of satisfaction for hearing-impaired consumers. Capitalizing on its advanced understanding of human hearing, the company has developed patented digital signal processing (DSP) technologies, and embedded them into the smallest single-chip DSP platform ever installed in a hearing aid. The company's Natura 2 SE, Tribute, Quartet, and the 2005 introduction of the Innova and Applause product lines, which all incorporate the DSP platform, are among the smallest products available today, and can be purchased in the six common models for hearing aids: behind-the-ear, in-the-ear, half-shell, in-the-canal, mini-canal, and completely-in-the-canal. Of these product families, Tribute, and Quartet are the lowest in price. The company in 2006 introduced its open behind-the-ear (BTE) product called Ion and other products. The company markets these products worldwide, through direct sales representatives, distributors, and retailers. In 2006, SNCI generated $105.5 million of net sales, 40% of which came from the North American market, 39% from Europe, and the remaining 21% from other regions. Net sales consist of product sales less provisions for sales returns, which are made at the time of sale. The company's primary markets are in the U.S., Canada, Denmark, England, Switzerland, Austria, the Netherlands, Germany, and Australia.

To boost its anemic growth, Sonic Innovations has once again adopted an acquisition strategy. In this strategy, the company seeks to expand its global retail operations through the acquisition of hearing aid practices. The company initiated this strategy in the third quarter 2006 with the purchase of six practices in multiple countries and geographies.

In addition to growth from acquisitions, sales growth has been benefiting from new product launches and further penetration of recently introduced products. Sonic Innovations completed the development of a higher-priced, next-generation product line called Innova. The company introduced Innova at the American Academy of Audiology Convention in Washington, D.C., which was held from March 30, 2005 to April 2, 2005. Introduction of this product line has been helping to expand sales growth and gross margin in a hearing aid market that is experiencing positive trends. In addition to the U.S., SNCI launched the English version of Innova in Canada, Australia, U.K., and France. Shortly after the non-English programming software became available, SNCI launched the foreign version of Innova in foreign markets on November 7, 2005. Furthermore, SNCI expects to launch additional products based on the Innova platform. These new products will cover a range of pricing points. The first of these products called Applause was also launched on November 7, 2005. Applause is a new family of mid-priced products that comprise about 40% of the worldwide market. By late first quarter 2006, the company launched worldwide on its second product called Ion, an open ear model. A next generation product family to Natura 2 SE called Natura Pro was launched during the second quarter 2006. The company launched a new high end product called Balance and a new version of Ion called Ion+ during the fall or fourth quarter 2006. During the first quarter 2007, an open ear version was added to the Natura line. A new premium product family called Velocity was launched in July 2007 and another open BTE product called ion 200 was launched in June 2007. More products are scheduled to be launched early next year. It is estimated that two of every 10 people suffering from hearing loss currently use hearing aids. This 20% represents a market worth over $5 billion. The company anticipates that demographic trends, such as the aging of the developed world's population, will accelerate growth in the size of the hearing-impaired population, which should result in increasing hearing aid sales over time. Thus the company is poised to capture a larger share of this market, with new products and investments in its sales and marketing programs.

The company expects to find additional growth from improvements to its distribution. The company sold its diagnostic business called Tympany in the first quarter 2007. The distribution of the diagnostic hearing-testing device called Otogram and referral of patients from primary care physicians (PCPs) to hearing care professionals never developed to the company's expectations. The company was up against the negative perception that the additional diagnostic procedure can hinder a PCP's business. Sales growth has been receiving a boost from the changes made to the management, sales structure, and sales process worldwide and also from the implementation of new pricing policies, controls, and procedures during the fourth quarter 2005. All these sales changes have resulted in the company gaining market share in the U.S. since the fourth quarter 2006. The company made additional changes to the management and sales structure in several European countries in the second quarter 2006. Sonic Innovations announced in January that it expanded its distribution channels by signing a support agreement with Audigy Group and signed a supply arrangement with Amplifon.

Competitive pressures in the U.S. market may drive North American sales down and depress gross margins. The company is competing against new products from larger competitors, pricing concessions, and appealing dealer incentives. One of the main factors that contributed to lost market share during a prior period is the lack of competitive features in all products previous to Innova. Furthermore, the larger competitors have greater marketing and distribution capabilities that allow them to more aggressively sell their products.

Higher than expected growth in SG&A can negatively impact earnings growth. The company has been making significant investments in sales & marketing programs and training.

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