Creative Returns to Profitability

After three rough quarters, electronics maker Creative announced it had returned to significant profitability on Wednesday, posting a small profit of $8.2 million, including a $6.9 million investment gain. However profits fell 31 percent from the year ago quarter as Creative continued to struggle in the MP3 market dominated by Apple.

Creative chairman and CEO Sim Wong Hoo promised investors that the company would make money once again after it posted a poor showing in August of last year. Wednesday's announcement even surprised some analysts, who were expecting Creative to post a loss.

Craig McHugh, president of Creative Labs, seemed to suggest that the company's foray into MP3 players may begin to take a backseat in the near future. "In the next few quarters, we plan to further lower our inventory, reduce our overall level of operating expenses, and we will increase our focus on our higher-margin businesses," he said.

Those higher-margin business would be where the company has excelled, and in some cases dominated, like sound cards. Creative has instead let these markets languish; for example, MP3 players and Web cameras now make up 67 percent of revenue, versus 13 percent for sound cards.

2.6 million of Creative's MP3 players sold during the last quarter of 2005, far less than Apple's 14 million. Based on those numbers, Apple is now outselling the company at a rate of five to one, the largest margin yet.

Creative also says it would focus on bringing inventory levels down, which would allow it to be "more nimble on pricing," according to McHugh.