MP3 player sales to boost profit at Creative
COMPUTER audio equipment maker Creative Technology Ltd will probably see quarterly net profits jump 39 per cent on the back of strong digital audio player sales, and could be boosted further by strong pre-holiday season demand, analysts said.
Creative, known for its Nomad range of MP3 players, is fighting to pump up its share of the high-growth digital audio player market, as its core computer sound card business declines.
It is due to unveil its fourth-quarter results today.
The first six months of its next fiscal year will rely heavily on new product launches, including its long-anticipated Zen Portable Media Center (PMC), developed in partnership with software giant Microsoft Corp, analysts said.
'The PMC should start contributing to sales in the October to December quarter,' said Daiwa Institute of Research analyst Pranab Sarmah. 'The Christmas quarter is usually very strong for them.'
The PMC pits Creative squarely against tech giants Apple Computer Inc and its popular iPod, Sony Corp, creator of the iconic Walkman - the digital version of which recently hit store shelves, and Samsung Electronics Co Ltd of South Korea, maker of the Yepp MP3 player.
The company should report a consensus net profit of S$190.7 million for the full year to June, according to analysts polled by Reuters Estimates.
Its net profit was seen by three analysts surveyed by Reuters at around US$6.4 million for the three months ended in June.
Their figures ranged from US$5.7 million to US$7.4 million and compared with a US$4.6 million net profit in the same quarter of 2003 quarter and earnings of US$57 million in the third quarter, which were inflated by a US$48.3 million investment windfall.
'Growth in the quarter will be driven by the PDE (personal digital entertainment) segment as the company continues to gain momentum in the MP3 player space,' UOB-Kay Hian Securities analyst Jonathan Koh said.
Creative, which is in the process of retiring its Nasdaq listing, forecast in April a 20-25 per cent surge in sales to US$185 million and a 20 per cent rise in earnings per share (EPS) to 7 cents for the June quarter.
The Zen Portable Media Center, which offers 20 gigabytes of storage for music, photos and video was available for pre-orders on Internet shopping siteAmazon.com Inc in early July. The device is expected to be shipped later this month.
In June, Creative also launched another iPod rival - the Zen Touch - a 20-gigabyte, 1.8-inch hard drive-based portable audio player that holds up to 10,000 songs.
The Zen Touch's battery is also billed to last three times longer than the 20-gigabyte iPod - up to 24 hours.
Creative chief executive Sim Wong Hoo told reporters last month the company was targeting monthly sales of one million digital entertainment gadgets worldwide by year-end, almost double current sales.
Apart from MP3 players, Creative also sells digital cameras and musical computer keyboards.
Its PDE category accounts for about one-third of total revenues, up from 19 per cent a year earlier, while the mainstay sound card business has fallen to 24 per cent of total sales from 30 per cent. - Reuters
Brokers' Take
Creative Technology
Aug 3 closing: $17.50
WE expect Creative Technology to report 23 per cent year-on-year growth in fiscal Q4 profit to US$5.7 million today. Revenue will increase 27 per cent to US$190 million, driven by higher sales of personal digital entertainment (PDE) devices. Gross margin will dip 1.3 percentage points to 34 per cent as the company builds MP3 players on an ODM basis for customers such as Dell.
Soundcard revenue is likely to continue to drift. We don't see any catalyst that will reverse the down trend. Indeed, Intel's June launch of its Grantsdale chipset - which promises better sound quality - may pose a competitive threat to Creative's low to mid-end soundcards. This is especially so given the new chipset is expected to sell for the same price as the previous one.
PDE devices will be the main growth driver. Creative has set its sights on sales of one million PDE products a month by the year-end - about twice the number it is shipping now. We believe it will be a huge challenge for the company to achieve this target, given stiff competition from Apple, Sony and Rio.
Creative also aims to quadruple revenue from Singapore to US$100 million annually by FY 2006. It has stepped up marketing efforts in Singapore by sponsoring a variety show and will advertise on TV for the first time. This is another major challenge, given the relatively small Singapore market.
Maintain SELL. Creative still faces declining revenue in its core soundcard business. And in trying to become a PDE company it will face consumer electronics giants such as Apple, Sony and Samsung, who have strong brand names and huge marketing muscle. Given Creative's low-teen revenue growth and declining margins, we believe the stock is fully valued at 12.4 times FY 2005 earnings.
- KIM ENG, Aug 3
AI
