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Flash famine a threat, warns Creative

Investments not products produce Q1 profit

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Creative saw its sales slide sequentially in its first quarter and was only able to declare a net income thanks to a big investment gain, the MP3 player maker and Apple rival said today.

Revenues for the three months to 30 September 2005 - Creative's first quarter of fiscal 2006 - came to $280.2m, up 33.4 per cent on the year ago quarter but 8.3 per cent down on the previous quarter's $305.4m.

Creative reported a net income of $700,000 (one cent a share), but subtract the effect of a $10m investment gain and the company lost $9.3m (11 cents a share). Q1 FY2006's profit compares with a Q1 FY2005 net income of $4.8m (six cents a share) and a $31.9m (38 cents a share) net loss in Q4 FY2005.

At least the company's gross margins improved significantly from the previous quarter's 10.1 per cent to 20.2 per cent. That, plus a 123 per cent year-on-year increase in MP3 player shipments and an eight per cent reduction in the firm's inventory stockpiles, bodes well for the future.

However, company president Craig McHugh admitted that the company is facing a shortage of 1GB solid-state memory chips. The Flash famine is "primarily a result of a special deal that Apple has secured from a key supplier for the holiday season", he said. That supplier is believed to be Samsung. "This will impact availability of our 1GB flash MP3 players for the holiday quarter," he added.

Still, the company wants to get fully into the black by the end of the calendar 2005, and McHugh believes Creative has made progress toward realising that goal.

In Q1 FY2006, 66 per cent of the company's revenues came from MP3 players, compared to 44 per cent in the year-ago quarter. However, in Q4 FY2005, it was 68 per cent. Plug those numbers into Creative's overall quarterly revenues, and it emerges portable music player revenue fell 10.7 per cent sequentially. Creative didn't say how many players it shipped last quarter, but it's likely to be a lot fewer than the 6.5m iPods Apple sold in the same period. ®

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