CREATIVE ANNOUNCES Q4 FY05 RESULTS
Revenues up over 50 Percent Year-Over-Year on 260 Percent Increase of MP3 Unit Sales; Company Reports Loss Primarily Attributable to Lower-than-Expected Selling Prices and Inventory Write Downs
SINGAPORE – August 11, 2005 – Creative Technology Ltd. (NASDAQ: CREAF), a worldwide leader in digital entertainment products, today announced financial results for the fourth quarter and fiscal year 2005, ended June 30, 2005. All financial results are stated in U.S. dollars.
Sales for the fourth quarter were up 51 percent year-over-year, coming in at $305.4 million, up from $201.8 million in revenue for the same quarter last year.
Sales for the 2005 fiscal year were up 50 percent year-over-year, coming in at $1.224 billion, up from $814.9 million for the 2004 fiscal year.
For the fourth quarter, net income was a loss of $31.9 million with EPS of a $0.38 loss per share, including an investment gain of $9.3 million. Excluding the investment gain, net income for the fourth quarter was a loss of $41.2 million with EPS of a $0.49 loss per share. This compares to net income for the same period last year of $6.6 million with EPS of $0.08, including an investment loss of $0.2 million.
Net income for the 2005 fiscal year including investment gains of $74.4 million and a noncash impairment charge on 3Dlabs of $65.2 million, was $0.6 million with EPS of $0.01. Net income for the 2005 fiscal year excluding investment gains of $74.4 million and a non-cash impairment charge of $65.2 million, was a loss of $8.6 million, EPS of a loss of $0.10 per share. Net income for the same twelve months last year including the benefit of a $12.2 million tax write-back and investment gains of $72.6 million was $134.2 million with EPS of $1.61. Net income excluding the benefit of a $12.2 million tax write-back and investment gains of $72.6 million was $49.4 million with EPS of $0.59.
“Our Q4 unit shipments of MP3 players were up more than 260 percent year-over-year. However, this high growth was below our aggressive expectations for the period,” said Craig McHugh, president of Creative Labs, Inc. “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. During the quarter, there was a decline in the value of certain components in our inventory, including flash memory and hard drives, so we needed to take an inventory write down. Even though we increased overall revenues 50 percent year-over-year, the lower-than-expected selling prices for MP3 players and the inventory write-downs negatively impacted gross margins in the period. These factors combined with currency losses resulted in our loss in the period. While we are very disappointed that we reported a loss for the fourth quarter, we believe we can get closer to break-even in the current quarter and that we can return to profitability by the end of this calendar year. We plan to return to profitability by continuing to grow our MP3 business and growing our audio business following the launch of the new Sound Blaster® X-Fi™ and the new Xtreme Fidelity™ audio standard, which we introduced this week.”
“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,” said Sim Wong Hoo, chairman and CEO of Creative. “Just this week, we introduced what I believe will be the future direction of audio – the new Xtreme Fidelity audio standard and its first incarnation in products, the Sound Blaster X-Fi sound cards. Over the last month we have toured the world demonstrating the new Xtreme Fidelity standard and the Sound Blaster X-Fi to the press, and the response has been phenomenal. The new Xtreme Fidelity literally wowed people as we clearly demonstrated how the Sound Blaster X-Fi family of ultra high performance sound cards can dramatically enhance MP3 and CD music, virtually any music or audio, accelerate gaming, and provide an amazing headphone experience.”
“Over the past seven years we have relentlessly and painstakingly built our EAX standard to become the unified audio standard for the PC platform,” continued Sim. “Xtreme Fidelity will be the fifth generation of this well-established PC audio standard, where virtually all existing games and media content under the Windows platform can be instantly enhanced without any modification.”
“We also showed the press the award-winning Zen™ Micro Photo MP3 player and the new Zen Vision, our music, photo and video player, due to be released soon,” continued Sim. “We received overwhelmingly positive responses to these exciting new products from some of the toughest and most astute reviewers. With the Zen Vision, you can now carry all of your music, all of your photos and all of your favorite videos in the palm of your hand. I believe we now have the sexiest, most appealing and most versatile digital music, photo and video player in the world. We believe that we will greatly strengthen our product offerings in our key product categories in time for this holiday season. By next year you can expect the Xtreme Fidelity standard to be included in some of our high-end digital media players. With our huge arsenal of audio products, technologies and intellectual property, you can expect Xtreme Fidelity to proliferate into all kinds of audio products going forward.”
Comments - Much worse than expected. More losses expected this quarter before it return to profitability next quarter. I expect share price to continue to drop then. Will re-evaluate again after next quarter results, unless price drop below $10 :D
Reports (added on 12-Aug)
- DBSVickers dated 12-Aug,
CREAF’s 4QFY05 earnings would be within expectation if we exclude the S$20m inventory write-down. If we also exclude investment gain, net loss would be US$12m. No specific guidance was offered but the Group targets to breakeven this quarter and return to profitability in the Christmas quarter. The fall in its investment value has resulted in a lower historical BVPS of S$11.40. New products were announced and we see a potential blockbuster in X-Fi, an audio chip processor that could have numerous applications. With the stock trading near book value and the Christmas quarter approaching, we believe downside risk is limited while earnings momentum should pick up from the trough. As such, we upgrade the stock to a HOLD but trim our DCF derived price target to $14.00. - CIMB-GK dated 12-Aug,
We believe Creative will continue to face ferocious competition in MP3 products. We understand that Apple’s new iPod mini and iPod are due for release this Christmas. Other players such as Samsung, Sony, and iRiver have also been launching new products. Another threat may come from MP3-enabled handphones. Creative is now pinning its hopes on its new audio product, the X-Fi, which provides a more realistic surround experience with headphones or multi-channel speakers for all types of digital entertainment. However, we are more cautious and have modelled moderate growth. We have slashed our FY06-07 net profit forecasts by 76-79% to reflect lower gross margin assumptions. Our unchanged target price of S$8.45 is based on 0.8x P/BV, which appears to be the trading support in the last five years.
Disclaimer : The above info is for reference only, not an inducement to buy or sell.
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