Creative Technology sees profits crash amid competition

Price competition hit Creative Technology profits as it barely managed to make a profit on sales of $1.2 billion in the year to the end of June, it said.

Creative Terchnology has announced that misjudgement of the competitive digital music player and computer audio market by company management has meant it barely managed to make any money in its last financial year despite strong sales growth.

The Singapore-based maker of digital audio players and PC audio components said total sales for its financial reporting year ended June 30 doubled to $US1.2 billion compared to a year earlier, but net profit crashed to $US0.6 million from $US134.2 million in the previous year.

In the April-June period, its fourth quarter, stiff competition in the MP3 market caused prices to crumble, hurting Creative. The company posted a loss of $US31.9 million as sales dropped to $US305.4 million from a record $US333.8 million in its previous quarter.

"In the fourth quarter, although we increased overall revenues 51 per cent year-on-year and unit sales of our MP3 players were up 260 per cent year-over-year, we had initially set higher targets for unit volume and average selling prices for MP3 players than we achieved in the period," president of Creative Labs, the US subsidiary of Creative Technology, Craig McHugh, said.

The average selling price was hit by fiercer than expected price competition in the market, McHugh said.

For example, the price of its popular Zen Micro player fell by about $US40 during the April to June quarter, he said.

"The lower than expected selling prices for our MP3 players were the result of price reductions we needed to take in the period to respond to large price reductions by competitors in the MP3 player market," he said.

McHugh later identified price cuts by market-leader Apple as being the main reason that Creative had to lower its own prices.

Slower than hoped for sales of players also meant the company was left with more products and components on hand than it had anticipated.

With prices of components falling, particularly those of flash memory and hard-disk drives, the company had to write-off about $20 million of inventory, McHugh said.

Looking ahead, the company wouldn't break out revenue or profit targets for the coming months but McHugh said he expected Creative to return to profitability by the end of the calendar year.

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Martyn Williams

IDG News Service
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