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Audearas transformative global sales deal

A sales deal between a hearing assistance company and a maker of loud percussion instruments may seem incongruous, but to the ASX-listed Audeara (ASX:AUA) the transaction sends out all the right notes – loud and clear.

Audeara is best known for its headphones that adjust the volume and other levels to the wearer’s individual profile, with the help of its proprietary algorithmic-based tech.

The A-O1 and A-O2 headphones are sold via hearing clinics, notably the global giant Amplifon which has more than 300 clinics here.

The products are available in 10 countries, including the US and France via tie-ups with hearing houses Demant, WS Audiology and Specsavers (which is making a concerted push into the hearing sector).
Audeara CEO and co-founder Dr James Fielding says Audeara’s overriding principle is “better, not louder”.

He compares the experience to a driver listening to the radio with the window open and then closing it.

“You haven’t changed the volume of your radio by one iota, but your experience is transformed because you have changed other factors.”
Having gained slow but steady traction with its $399-a-pop headphones (and a $599 TV listening package), Audeara is pursuing a strategy to develop and licence its underlying sound-enhancement tech to other parties.

Last month Audeara’s AUA technology arm won its first purchase order to mass produce for instrument giant Avedis Zildjian, which makes cymbals, drumsticks, gongs and other percussive paraphernalia.

Zildjian products are sold globally under the Zildjian, Balter and Vic Firth (headphone) brands and are used from everyone from beginners to the world’s greatest rock stars, jazz performers and concert percussionists.

The initial order is valued at $2.1 million, with “the timing and size of future orders determined by market success of the product.”

“Building best-in-class audio solutions is our passion,” says Audeara co-founder Alex Afflick.

“Audeara envisions this partnership is just the beginning of future product sales and licensing agreements aimed at expanding the reach of our technology in collaboration with established industry leaders.”

The deal is “likely to have a significant positive impact on the company’s cash flow and the push towards breakeven and profitability.”

Otherwise, Audeara’s compliance disclosure keeps mum on the details, in deference to the highly-private, 401-year-old Avedis Zildjian.

Founded in Constantinople (now Istanbul) by Armenian Avedis Zildjian, the company is one of the world’s longest continuous-operating enterprises.

(A family name conferred by the prevailing Sultan Mustafa I, Zildjian literally means ‘cymbal maker’ in Turkish).

Avedis Zildjian now operates from Norwell, Massachusetts but remains controlled by the Zildjian family.

These days, all Zildjian instruments are made in the US at the company’s cymbal factory in Norwell and drumstick/mallet facility at Newport, Maine.

A Brisbane-based medical graduate and reputed to be a keen drummer himself, Fielding co-founded Audeara after becoming frustrated by the ponderous hearing test process while doing his training.

Audeara listed on the ASX in May 2021, having raised $6 million at 20 cents apiece.

In reality, the hardware componentry – the headphones – are generic items.

Audeara’s ‘secret sauce’ lies in the in-built testing function that does away with bulky audiometers that cost thousands of dollars.

In the testing process, the user dons the headphones and via beeps the volume is turned down to the hearing threshold (bear in mind these settings vary not only from person to person, but from left ear to right ear).

The gadgets certainly don’t replace hearing aids, but enhance the ability of hard-of-hearing people to enjoy music, television or Zoom calls and the like.

Because the headphones are not classed as medical devices, Audeara does not have to undertake ongoing compliance and certification. On the flipside, because they are ‘serious’ hearing devices they are reimbursable.

Currently, Audeara accounts for half of all non-hearing aid devices sold under the federal government’s Hearing Services Program and one-fifth of those provided under the Department of Veterans Affairs banner.

Audeara last month reported half-year revenue of $786,000, down 42 per cent owing to lumpy sales orders.

“We weren’t expecting the Australian market to blow the lights out but the March quarter looks good,” Fielding says.

The company’s net loss of just over $1 million improved on the previous previous $1.87 million deficit.

December-end cash stood at $1.6 million cash balance, with a $673,000 research and development tax incentive banked this week.

Fielding says the company is at the “tipping point” where a few more purchase orders will turn the bottom line from red to black ink. At the same time, operating costs shrunk by 42 per cent to $858,000.

“I feel we have battened the hatches and crossed the stormy seas,” he says. “Investors these days don’t like growth at any cost, but growth at appropriate costs

“We have sucked out an awful lot out of operational expenses and if we can keep revenue growing we can muscle through the tough times.”

Fielding says a key benefit of selling through audiologists is that the clinics pay up front, whereas a retailer such as JB Hi-Fi and Harvey Norman will buy on consignment (the cash flow is not realised until – and if – a unit is purchased).

“Also, our product usually is the only one on the shelves.” Iain Wilkie, an analyst at broker Morgans says the Avedis Zildjian win is the type of deal Audeara has been flagging for some time and “provides significant market validation of the quality of the product.”

He says while the tech division’s gross margins are lower than those on Audeara-branded headphones, the company incurs no sales, marketing or distribution expenses.

Investors were listening, with Audeara shares doubling after the February 27 Avedis Zildjian announcement.