MP3 player sales drive Creative to record Q3

Strong sales of MP3 players helped Creative Technology achieve record sales during the first three months of this year but increasing competition drove down profits, the Singapore-based company said Friday.

Net sales for the January to March quarter were US$333.8 million, up from US$201.8 million a year earlier, which was a company record for any quarter other than the holiday season. Net income was US$15.9 million for the quarter, down from US$57 million in the same period a year ago. Both periods included extraordinary gains on investments. Excluding those gains, net income for the quarter was US$1.1 million versus US$8.7 million a year ago.

"Strong sales of the Zen Micro 5G-bytes [player] and MuVo Micro flash player helped us to achieve sales of 2 million MP3 players in the period," said Craig McHugh, president of Creative Labs., the company's U.S. unit, in a conference call with analysts. Creative saw strong demand in all regions for its MP3 players and achieved sales of 2 million MP3 players for the second quarter in a row, he said.

McHugh credited the higher sales to the general expansion of the MP3 player market in addition to regional consumer advertising campaigns in Asia, Northern Europe and the U.S. West Coast; a channel marketing campaign; lower prices; and the addition of new retail outlets. These new retailers included Best Buy and Circuit City in the U.S.

The quarter saw increased competition in the market especially from Apple Computer Inc., which in January reduced the price of its popular iPod Mini player and introduced the low-cost iPod Shuffle flash player. This pushed Creative to reduce prices and led to a reduction in the profit margin on each player it sold.

"During the quarter we reduced the selling price following sharp price drops by Apple on the Mini and the introduction of flash players as lower than expected prices," he said. "These were the major factors in the decrease of gross margins."

Gross margin during the quarter averaged 23 percent, which is substantially lower than the 34 percent that Creative reported a year ago. In the near future the company expects to see gross margins fall towards 20 percent, said McHugh.

For the current quarter, the period from April to June, Creative is expecting revenue of between US$330 million to US$360 million, which would represent a 65 percent to 80 percent increase over the same quarter in 2004.

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