Intelligent earbuds: Nuheara

Justin Miller is the Chief Executive of Nuheara. They’re a start-up tech company in Australia that’s got earbuds, but they’re intelligent earbuds, and they’re showing very interesting growth. 

Here's Justin Miller, the Chief Executive of Nuheara.

To bring everybody up to date you’re CEO at Nuheara, it’s a start up but it had products out in the market before it listed last year and this is not your first start-up, is it, so tell us a little bit about you first.

My background is I’ve had a number of start-ups that have gone on to be quite big companies, IT services companies.  My last company before Nuheara was an industrial hearing company again with some innovative Australian tech that we productised, commercialised, monetised, multi-million dollars of sales.  I spent some time in the U.S. having moved there to build up that business and returned to Australia about four years ago.  That’s where this whole concept of Nuheara and the consumer and providing an innovative solution to what we see as a growing problem over the years and that was providing some assistance to people that needed it, hearing assistance.  But, also providing functionality that they were used to from a hearing device which included phone calls and music, and these sorts of things.  So, a little bit of my background is I’ve been involved in a number of different start-ups, all quite successful, and I’m pleased to say Nuheara is following that same route.

Constant Investor subscribers are interested in Nuheara.  It calls itself an innovative audio wearables company but we’re talking about earbuds, ear phones that are wireless that fit into your ear.  So, tell us a little bit about the technology and the products that you’ve got out there.

Yeah, we classify ours as hearing buds because they are multi-functional buds.  As a company we focussed on transforming the way people hear and initially, we’ve been around, we’ve been listed for two years actually, we bought our first product to market in January of last year and they’re now sold in major consumer electronics retailers around the world.  That quickly grew to 1,500 stores plus big online presences.  This was allowing people to completely control the way they hear so that’s controlling their environment or perhaps listening to music or taking phone calls or augmenting their hearing situation and that would mean overlaying perhaps your digital world with your physical world.  An example of that might be you’re out walking, you’re listening to your music but you’ve also set it in such a way that you can hear your surroundings.  That’s one of the innovative features that we offer, so that’s augmentation.

Another one was an intelligent noise control, so the ability to enter particular environments, control your background noise in relation to conversation which was advantageous and gave us a lot of indications then for where we are today, new products and how we’re pretty much evolving more into the hearing healthcare market.

Yeah, you’ve launched a product that targets that specifically now, haven’t you?

Yeah, the thing we found having brought that product to market and having sold thousands of these around the world, that people were using them to provide hearing assistance.  One of the interesting things about the hearing healthcare market, if I can talk about the hearing aid market, which is really designed for those with a disabling loss or a profound or severe loss.  That’s about 30% of the market and it has good penetration levels and people get good assistance at those levels.  What we found at the mild to moderate loss end, which is about 70% of the global hearing loss market, there was penetration rates of about 10% and there are a number of major reasons for that and one is accessibility and the other is affordability.  So, we looked to solve a couple of those problems with some of our new products and that’s targeting a market which is growing, unfortunately, hearing loss is growing.  It represents 10% of the global population.

For us it was a market that needed some innovative type devices to help people.  The interesting thing about hearing aids is that the median age of a wearer of a hearing aid is about 72, what we also know is that most people start to lose their hearing at about 35 which is the mild to moderate category.  There’s a massive market there that’s under-serviced in that 35 to 70 year old range and we thought through providing products that could be self-fitted, self-configured at a much lower price point that are more suited to a lifestyle product, music, phone calls, those sorts of things, would be beneficial and so we set about building a product that enables us to cater to that particular market.

And as hearing degrades filtering unwanted sound is one of the sort of early indicators and it’s just so annoying, I think, for people as they get older.  They’re in a crowded restaurant or a bar, there’s noise coming at them from everywhere and they have difficulty focussing in on the noise they want to hear.

Absolutely, and that’s one of the key benefits of the product we offer.  Even in our early product IQ Buds and now with IQ Buds Boost, is that ability to treat the environment.  So, our innovation has this ability to treat the environment, not just the individual.  Because, you can amplify things but in amplifying everything you can sometimes make the situation worse.  The ability to use some innovative technology and allow you to treat the environment as well as configure it to your own personal hearing profile is a big step forward.  We believe in hearing healthcare.

Is there an issue in that quite a few of your users are going to be sort of middle aged up, this is an app driven technology.  I went on and had a look at some of the reviews and early on people were saying I can’t get the app to work and so on.  Do you run into that issue, that you’re using cutting edge technology, you’re using apps, people are getting used to them but are still sort of familiarising networking the app on the phone and the device that they’re using?

Yeah, that’s a good question and yes there are challenges in that regard.  One of the learnings we took from our early product that we had in the market was this ability for people to self-configure.  What we did with Boost, our new product, was that we integrated a hearing assessment within the product and that hearing assessment then automatically configures the product using hearing aid prescription formulas and prescription formulas which are used by all the major hearing companies around the world.  We then use that prescription formula then to automatically configure the ear buds to that particular user’s profile and that’s taken a lot of the angst out of setting up the product in that you can self-fit, you do it in your own home but it’s set to your hearing profile.  So, we create what we’ve termed an ear ID, and that ear ID is a relatively simple process that takes a lot of the configuration work out that we had in our earlier product IQ Buds.

So, we’ve seen certainly in our consumer testing a lot greater acceptance of the product and the ability to use that product through the learnings we’ve had through having a product out there over the last 12 months.

It’s great when you’ve got technology as a consumer that is intuitive like that.  I’ve got Sonos and you can get it read the rooms for the speakers for example.

That’s actually an interesting sideline in terms of the way people are getting used to voice and response through speakers, and we believe that there’ll be a personalisation of that through hearing buds.  The speakers, the products you’re talking about, are becoming more prolific on a day to day basis.  People are putting them in their rooms and they’re getting used to voice and response.

I’ve got Alexa right next to me, yeah.

Right, fantastic products but they’re room bound.  So, our belief is even across the consumer electronics industry but also hearing healthcare industry is that hearing buds or ear buds will become the smart speakers of the future in that they’ll provide mobility outside of the room.  So, we see an enormous opportunity as those people get used to voice and response but they’ll want mobility in that mobility in that particular service and that is truly going to come through intelligent wireless ear buds.

Alright, now who are the competitors, what is the competition?

Yeah, it’s interesting for us.  I mean we started in the consumer electronics space and bought some sophistication and some hearing intelligence into that particular space.  We’re at the upper echelon of a really intelligent headphone.  What we found through use of the product was that people were using it for a number of different ways, obviously to compensate and to tune it to their own hearing profile but also in a manner that we hadn’t anticipated and that was in relation to concentration type disorders and this relates to auditory processing disorder, autism.  That ability to treat the background environment was providing the ability for people with these types of disorders, young or old, to enable them to concentrate on a situation.  In fact, we have kids as young as eight now using our earbuds in classrooms.  In a traditional sense they would have relied on an FM system, the teacher would have worn a microphone, the kid would have worn a headset and there would have been a one to one communication.  With our earbuds we’ve got the ability to turn all the background distraction down and focus on the conversation. 

It’s an interesting aspect to the whole hearing healthcare market.  These hidden hearing losses, as they’ve been termed, are likely to be twice as big as traditional forms of hearing loss and there aren’t a lot of solutions out there that cater to those particular needs.  So, at the one end of the market you’ve got hearing aids that target a particular market and that’s at the very top of the tree and at the bottom of the tree you’ve got headphones.  There’s not a lot that sits in between those particular products, so it’s early days.  We’ve got some ways to go in terms of educating the market but that gap between, I guess, hearing aids and headphones is our particular space and there’s not a lot that’s entered into that particular space.  So, we’re keen to fully exploit that.

How do you learn what use consumers are making of the product?  Do you get feedback from the app?

Yes, we do, which is allowing us to improve that interaction.  It’s allowing a better customer experience and it’s allowing us to build better products.  I mean, Boost came from the fact that we saw people using the augmentation features in such a way that we needed to allow better profiling and better hearing compensation for them.  Yeah that’s quite valuable and where hearing aids have just come into this sort of data realm they’re only really picking it up when people enter that market which is in the 70 plus.  What we’re helping to build is more data from – as I said, we’ve got people as young as eight and as old as eighty.  So, we’re getting a much better picture on hearing data and that data is enormously valuable in helping us build better products. 

Having products out there, having that app and being able to understand how people are using them is incredibly valuable.  To this point headphones and hearing aids don’t really provide that ability to access that particular type of data.  So, we’re fairly unique in that regard.

Alright, now there was news this month that you’ve been registered for the Australian governments $593 million hearing program, your shares popped on that news and they’re still I think 11 cents today which is close to the high they set earlier this month on that news.  Tell us about that and why it’s important?

We’ve registered, IQ Buds, the company was registered as a supplier under that contract.  It’s a big contract, Australia is one of the countries in the world that provides a fairly significant government funded hearing program to provide hearing assistance because accessibility and affordability when it comes to hearing assistance are not prevalent around the world.  The Australian government does a very good job in providing that assistance.  For us to be listed on that supply list and one of the few Australian companies that are listed, most of the hearing aid companies are international and assisted listening device companies are international based companies.  So, significant for us, lower price points both from a product perspective but also from a serviceability perspective.  A lot of the cost that goes into this market is spending time with people.  So, self-configuration, these types of things, are very significant.  It’s a big program and we’re keen to be part of that.

Yeah, you would be at the high end of the consumer market in terms of price and at the low end of the hearing aid market, am I right on that?

Absolutely, and it was interesting, the ACCC last year released a survey that highlighted the significance of price in hearing aids, and sales have been driven by commission rather than consumer needs.  They found hearing aids priced from $1,500 to $15,000 per pair.  We’re in the category of $500 to $600 per pair.  So, $1,500 you’re not getting much of a hearing aid and it’s interesting to note, and one of our big opportunities, is the change in legislations that are occurring.  The over the counter hearing aid act which has been passed late last year in the US is essentially designed to provide accessibility and affordability in hearing devices in the US because there is no Mediaid, there is no Medicare, and even private insurance doesn’t cover hearing devices in the US.  That’s spawned an interesting industry because the biggest provider of hearing aids in the US is in fact Costco because they’ve been able to drive the price down and people understand that to buy hearing assistance in the US is out of pocket expense. 

We see a significant opportunity in that mild to moderate category to provide hearing assistance that’s self-configured, self-fit, they can buy it, take it home and do it themselves and at an affordable price so, there’s some significance in that. 

What’s the situation with health insurance here, are you on the insurers’ lists?

No.  We’re seeking to do that now obviously with Boost and the imminent shipping of the Boost product.  Again, we can help to drive down the cost of hearing assistance through providing accessibility at those levels.  Unfortunately, there’s a lot of stigma associated with hearing and hearing devices.  Our feeling is with hearing buds rather than hearing aids is we’ve got the ability to provide a more lifestyle suited product that people are more likely to wear in those situations.  The health funds will become important for us but again it’s educating that particular part of the market which is a big part of the market but it’s going to take a little bit of time for us.

Alright, let’s have a look at some of the numbers.  I’m looking at the December half here.  There is an interesting set of figures, you lost $4.3 million but really this is a revenue growth story at this stage for you guys.  I thought it was interesting that at the operating level you actually turned a profit, revenue of $1.96, cost of sales $1.4 and a gross profit of half a million dollars.  That’s a good hurdle to clear at this early stage.  Tell us how you’re travelling, tell us about the cash burn, tell us about the revenue growth and where you’re headed.

Yeah, I think those numbers are a relatively good result.  As you say we’re in revenue growth, we have to spend to educate to push the product out there.  We’ve done a good job of that, we sold circa $4.5 million worth of product to almost all countries around the world in our first 12 months of selling, so a good success story.  Importantly, as you pointed out we were able to generate gross profits approaching 30%, we can improve on that – or gross margins I should say.  We can improve on that and certainly will through having multiple products released.  In fact, we’re releasing two new products over the course of this year which will enable us to build up our gross margins through diversification.  But we’re travelling quite well in the sense that we’ve had circa $20 million invested in us, we’ve seen other companies in the US that have invested nearly $100 million and haven’t got as far as we have so I think we’ve been able to do that very cost effectively and in doing so I think proving Australia is actually a fairly good place to develop tech.  That is from an R&D perspective at least we know we’re supported 43.5 cents in the dollar through the Australian government R&D tax offset which allows us to get cash back for the R&D that we conduct in Australia which is a great initiative and providing us with benefit in our early stages.

It’s great, we’re co-located, we have our main office in Perth but we have a sales and marketing office based out of San Francisco in the US.  It’s still early days for us but we’ve been able to show the market, the investor market at least, that the products are wanted and we’ve been able to develop new products.  We’ve got a fairly significant road map as we move forward.

At December 31 you had $5.6 million of cash on the balance sheet, total equity $11.1, so you’re obviously comfortable at the moment but of course the cash burn is going to sort of decide things as you go on and that in turn is going to depend on revenue growth.  What’s the trend on revenue growth?

The trend is positive.  In fact, a lot of that spend over the last half was building up our inventory levels as well.  Having built inventories, we’ve got stock in our four warehouses located around the world.

Yeah, I see a bit over a million bucks on inventories there.

Two million, yeah, nearly approaching two million in costs, so that’s fairly significant and that gives us the ability.  We’re turning sales every single day and with multiple products out there have the ability to grow that, and in fact our response to the Boost product, which we announced pre-orders, has been quite overwhelming in fact.  There’s a proven need there for a really good multi-functional hearing ear bud for the market and we’re very excited by having multiple products in the market as we move forward.  That product ships in the next three to four weeks, so we’re incredibly excited by having two products in market.

Who are your significant shareholders?  I read that WAM is in there, I’m not sure whether it’s WAM, are the founder shareholders still all there?

Yes, absolutely.

Are Wilsons still there?

Wilsons, I am not too sure.  We were in a micro-cap fund that they had set up.  Interestingly we do have the likes of IFM.  There’s a number of funds that have participated at an early level.  Having said that we’ve grown from the point of listing 400 shareholders to nearly 4,000 shareholders so there’s a number of retail investors, a number of which are just interested in the story, know that we’re doing something positive.  There’s a number of investors that are in there for different reasons and that’s significant for us.  We’ve got a great deal of support from individuals that see that we’ve got some game changing products that they’re interested in more so than a simple investment.

What is the cash burn running at right now and have you got a target to shift it into the black, a target time?

Yeah, look we’re very careful about that.  I mean, it’s still early days for us so to put those projections out there is a very difficult thing for a small business and something we’re very cognisant of, and particularly in relation to how tech and very much of recent times has been regarded on the ASX.  So, very careful with what we do put out there, we’re very factual, we’re very careful not to mislead because at the end of the day it’s about building a credible business and I think we’ll continue to be cautious as to how we push out those particular numbers but I think from a cost efficiency point of view, if I can touch on that, if we don’t manufacture, if we don’t market, then the cost to run the business is quite minimal.  We’ve got a global business that’s got 30-odd people, it’s not a hugely expensive business to run and it’s got a lot of smart people, that makes a difference.

Where are the buds made?

We use an international company called Flex, or Flextronics as they were formerly known.  Flex is one of the largest contract manufacturers in the world.  They manufacture in 40-odd countries, have 140 facilities, they’re very large.  Ours are manufactured in a facility in Zhuhai which is just sort of behind Macau in China.  That facility has about 60,000 people on it, that one campus.  We’re manufactured in one building in that particular facility where they also manufacture the likes of Garmin, Fitbit, and others.  We’re in very good hands in terms of scale and quality, and they’re a world-renowned contract manufacturer.  For us scale and quality are issues that are really taken care of by contracting one of the best in the world.

Alright, I think our time is starting to run out but one of the things I think – I don’t know whether you would call it a trend or just a fact of life in the IT space, is that small companies can come up with great technology and can get it to market, and at that point they either get taken out by one of the giants or one of the giants blows them out of the water by just basically replicating the technology in some shape or form.  How do you protect the technology you’ve got and are there any giants out there looking at this space or do you think you’ve found a niche that gives you room to grow in?

Good question.  There’s no doubt it’s a niche but it’s a massive niche.  The expectation is there is going to be competition in that particular space and we welcome that competition because educating that particular market is going to take many forms.  I think if I look at the top of the pyramid, which is hearing aids and those sorts of things, there’s a lot of competitors in that space that are running fairly significant businesses.  At the bottom end the headphones are prolific.  There’s room for competition and we’re not frightened by that competition.  I think what we’ve been able to demonstrate is that we’ve had products fairly unique – well not fairly but very unique in their approach to hearing.  They’ve been in market and out there even as a concept for nearly three years now. 

For us we still haven’t seen anyone enter this particular space and that’s because hearing is hard.  The expectation is that it will get easier but where it sits today is we’re comfortable that we’re unique enough and gaining acceptance and gaining traction.  We’re market-first, we’ve got to worry about competition second.  If we sit here and worry about what the big guys are going to do we’d never get anywhere.  So, we’re clearly focussed on bringing game-changing hearing solutions to market that are accessible and affordable and that is the pathway for us to sustainability and profitability.  Once we reach those then anything is possible.

Alright, well it’s a fascinating project you’ve got there.  It’s great to see an Australian company bringing a product like this to the world, and all the best of luck for the future with it, Justin.

Thank you, I appreciate Constant Investor’s interest.