Creative Reports Wider than Expected Loss

By Ed Oswald, BetaNews

August 11, 2005, 1:23 PM

Creative late Wednesday admitted that disappointing sales of its MP3 player line dragged down the rest of the company, causing a wider than expected quarterly loss. However, the Singapore electronics maker said it expected to return to profitability by years end with two new MP3 players with multimedia capabilities, and a refocus on its traditional computer hardware business.

Also bringing down profits was a decline in the value of Creative's inventory and downward price pressures from its rivals. Apple during the quarter ending June 30 was able to lower prices across its line, causing rivals like Creative to follow suit.

"We had set our targets higher for unit volume and average selling prices for our MP3 players than we achieved in the period. Missing our targets caused us to miss our revenue goals and we were not able to reduce our inventory levels as rapidly and as much as we had expected," Craig McHugh, president of Creative Labs said in a statement.

The company reported a loss of $31.9 million or 38 cents per share versus a gain of $6.6 million or eight cents a share in the year ago quarter. Analysts had been expecting an average loss of $7.2 million for the quarter.

Apple, on the other hand, beat the Street, posting a $320 million profit on sales of $3.52 billion. During the same quarter, 6.2 million iPods were shipped - 1 million more than market forecasts were expecting.

Analysts say the road ahead for Creative will not get any easier. With continued intensification of the market, if Creative is not able to move inventory fast enough it may have to write off obsolete players, causing financials to worsen.

But there are better times ahead according to Creative. The company plans to introduce its highly anticipated Zen Micro Photo in September, and will soon begin shipping the multimedia-capable Zen Vision as well. Also, the company pointed to its traditional businesses in computer hardware where it plans to introduce several new sound cards to the market.

"While we continue to work diligently through our inventory position and are very focused on returning to profitability, we are not hesitating in driving our company forward," Sim Wong Hoo, chairman and CEO of Creative said. "We believe that we will greatly strengthen our product offerings in our key product categories in time for this holiday season."