Creative Technology Ltd, the manufacturer of PC sound and graphics cards, has revealed a troubled fourth quarter, shot through with declining profit margins and falling revenues. Having warned in June that conditions were far from normal, the Singapore-based maker of Sound Blaster cards has reported net profits down 91% at $4.8m on revenues down 10% at $253m. Sim Wong Hoo, Creative’s CEO, said the results were in line with our most recent guidance but shares in the company fell over 5% on Thursday in advance of the figures and the stock is squatting at a 52 week low of $11. Creative’s gross profit margin fell sharply in the final quarter to 25.6% compared to an average of 31.3% over the year. Explaining the drop at the time of the earlier profits warning, the company blamed oversupply in the low end graphics card market and a similar downturn in prices for older sound card technologies, a story which it stuck to in its conference call to analysts. Creative still derives 34% of its sales exclusively from Sound Blaster cards, and a further 28% of sales come from ‘multimedia upgrade kits’ which often include such cards. Delays in the launch of its latest card, called Sound Blaster Live!, left the company bereft of a high margin product in the final quarter, and compounding the problem, Creative said its PC owning customers had postponed purchases to wait for the new card’s arrival. Sound Blaster Live! started shipping last week, too late for the fourth quarter, but Creative says the product is strong enough to reverse the recent trend of falling sound card revenues. Once responsible for over half of the company’s sales, Sound Blaster is expected to climb back to around 40% of the total in the current quarter. Longer term, the company is still bullish about its market share, but the depressed stock price tells a different story. Within the investment community, Creative is suffering from a perception that its sound card business will soon be eaten up by twin giants, Intel Corp and Microsoft Corp. Intel continues to add new functionality to its microprocessors, with MMX technology already subsuming some of the functions traditionally performed by sound cards, and it promises more of the same to come. Add to this the arrival of plug-and-play speakers using the new Universal Serial Bus (USB), a market which Microsoft is poised to enter, and you could view Creative as a company with a great deal to lose. At present though, it maintains that its sound and graphics products are the best the market has to offer, and it continues to spend heavily on researching new sound and graphics cards. á
