Creative's Loss Surges on MP3 Woes

Creative's losses widened in the third quarter as the company's digital music player business continued to struggle in the face of price pressures and fierce competition from the Apple iPod. But Creative showed no signs of a willingness to abandon the effort that has been spearheaded by its vociferous chairman.

Sim Wong Hoo made digital media players Creative's premier business two years ago in a bid to take on the iconic iPod. However, while vehemently defending his decision and products since then, none of the company's players have caught on with consumers.

For the three months ending in March, Creative posted a loss of $114.33 million, compared with a $15.91 million profit in the year ago quarter. Revenue also shrunk by a third, from $338.8 million last year to $225.7 million in the current quarter.

The loss included a charge of $41.60 million due to restructuring related to Creative's 3DLabs division. The company said the charge was necessary in order to reduce operating expenses so it could focus on its handheld device market.

In a statement announcing the results, Creative Labs president Craig McHugh explained the factors causing the company's financial woes, which included the 3DLabs restructuring.

"There was a drop in flash memory prices in the quarter, with a precipitous drop in prices at the end of the quarter," he said. "This had a significant adverse effect on our sales in the quarter, and resulted in lower revenues, lower gross margins and inventory write-downs in the period."

McHugh said the company would look at all of its divisions to see how the company can improve revenues and reduce operating expenses. Creative is also targeting profitability by the end of 2006.

Analysts said that Creative must reduce operating costs if it wishes to return to profitability, and that might include a hard look at the digital media business to see if it is truly viable for the company.

Also, Creative must improve its execution, say analysts. While flash memory prices affected all device makers, Apple was able to handle the drop much more effectively. A function of this could be the fact that Apple has much more control over supply then its smaller rival.