Creative Technology Heading Down

Consumers are deserting Creative Technolgy makers of the Zen and MuVo music and video players in droves. Now questions are being asked “Can the Company Survive”.

As tipped by SHN Creative Technology is losing it’s battle with the Apple Computer’s iPod after the Company  reported its largest ever operating loss in at least five years. During the past six months the stock has falled 28% making them the second- worst performer on the 190-member Morgan Stanley Capital International World/Information Technology index. Sales have slumped 34% with many tipping that the Company will not survive in the tough portable music and video market. Expected losses for the year will be over $100million.

Retailers are starting to dump the Creative digital music and video players in favour of products from Samsung or Sony. Earnings at Creative, which gets two thirds of sales from music players, are slumping as Apple’s iPods outsell the Singapore-based company’s Zen and MuVo devices five-to-one.

Falling prices of flash memory, used to store songs in the players, are also hurting Creative as its customers are delaying orders on expectations of
further price drops. “Creative tends to set aggressive expectations and build inventory,” said Claudio Checchia, a research manager at IDC. “But they don’t achieve the target average selling prices, and they have to keep cutting prices to keep up with the competition like Apple and battle falling flash memory prices.”

Creative had $301 million in inventory at the end of 2005. The company had an operating loss of $55 million to $65 million in the third quarter ended March 31 because of a “drastic drop” in flash memory prices, Creative said in a preliminary earnings statement. Creative expects sales of $220 million to $230 million, a fall of as much as 34 percent.

 It posted net profit of $15.9 million on sales of $334 million a year earlier. Patrick Yau, a Singapore-based analyst at Macquarie Research, expects Creative to report a fiscal thirdquarter net loss of about $100 million. Spot prices of the 2-gigabit NAND flash memory chip tumbled 69 percent in the three months ended March and are unlikely to rebound in the current quarter, according to Dramexchange.com,

Asia’s biggest spot market buyer for chips.Creative said the price decline for flash memory was most severe at the end of the quarter, hurting sales of its players and forcing inventory writedowns. Sigmatel, which supplies chips for Creative’s music players, on March 29 said its gross margins in the first quarter were hurt by falling flash memory prices and weaker-than expected demand in Europe. Creative’s chief executive, Sim Wong Hoo, is trying to trim Creative’s reliance on music players, introducing products such as new Sound Blaster cards, which enhance audio played through personal computers. The company’s operating loss for the quarter ended March 31 is in addition to $34 million in costs related to its graphics unit 3D Labs. Creative on Feb. 24 said it will cut 100 jobs at 3D Labs at a cost of $9 million, and take an additional $25 million in costs for writing down the value of the unit.

The loss underscores the difficulty music-player makers face in trying to topple the best-selling iPod. Japan’s D&M Holdings, the maker of Rio digital music players, said in August it would pulling out of the market amid escalating competition, and Dell in February stopped selling its most expensive digital music players.