Creative profits down despite strong sales

Looks to high-end products to boost its fortunes

By Tony Smith, 26th January 2006

Creative experienced a dip in profitability during the final three months of 2005, the second quarter of its 2006 fiscal year, despite big sales gains pushing revenues to their highest level in five years.

Revenue for the period totalled $390.8m, up 4.2 per cent from Q2 FY2005's $375.1m and 39.5 per cent on the previous quarter's $280.2m. Net income was $8.2m (ten cents a share) down from the year-ago quarter's $11.8m and up on Q1 FY2006's $700,000 (one cent a share).

Q2 FY2006's income was boosted by a $6.9m investment gain. So too was the previous quarter, to the tune of $10m. Q2 FY2005's net income was hit by an aggregate impairment of $13.7m, according to Creative today, as a $65.2m cost relating to the acquisition of 3DLabs wasn't fully compensated for by an $51.5m investment gain.

Creative said it reduced its inventory 18 per cent over the previous quarter's level and pledged to continue lowering it during the current quarter. Creative ran into trouble during the three months to 30 June 2005 after sales failed to match the company's forecasts, leaving it with stacks of unsold product and plunging the firm into the red.

Six months on, Creative's president, Craig McHugh, said the company was focusing its efforts more on higher-margin business - primarily its high-end MP3 players and audio products - and working to reduce operating expenses, though he didn't detail how. ®

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