Published October 30, 2008

What next for Creative?

By ONG BOON KIAT
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CREATIVE Technology has fought waning sales, slipping bottom lines and cut-throat competition for the past three years - but those could be mere skirmishes ahead of the real war. If recent developments are anything to go by, the company could be facing the toughest battle of its 27-year existence.

A first-quarter net loss of US$32.2 million, announced last Friday, signposted an alarming start to its new fiscal year. But what is more worrying is Creative's pessimistic forecast for its customarily strong holiday season - a Q2 revenue range of between US$140 million and US$160 million.

Why are alarm bells ringing? If its projections hold sway, the current quarter will be the company's worst Q2 performance in terms of revenue in the last 15 years. When it last posted lower Q2 sales, in its FY1993, the company was still a tech upstart fresh from a prestigious Nasdaq listing.

With the gloomy forecast, what does the future hold for Singapore's most famous high-tech poster child of the last two decades?

A return to profitability in the near future can be ruled out, according to several analysts who track Creative. This week, CIMB-GK Research revised its forecast on the company, predicting losses instead of gains for FY2010 and FY2011. It now expects full-year net loss of US$29.6 million and US$14.8 million respectively for those two upcoming fiscal years. The research firm also predicted a full-year net loss of US$45.4 million for Creative's current FY2009.

The research firm maintained a target share price of S$4.13 for Creative, but the latter is hovering way below the mark, closing at S$2.54 yesterday.

In its Q1 earnings statement, Creative blamed 'worsening global macroeconomic conditions' for its poor Q1 showings, and listed 'challenging market conditions' as reasons for its sombre Q2 revenue forecast.

It said it has reduced operating expenses in Q1 from the previous quarter and improved gross margins as a result.

But Creative will have to do more than just ride out the economic crisis and trim its operating expenses. It has to find a way to spark interest and re-ignite demand for its MP3 players, PC peripherals, sound cards and other accessories.

Since its FY2005, Creative's sales have been on a downward trend. Its latest Q1 sales fell to US$141.2 million from US$184.6 million from the year-ago quarter. And full-year revenue for FY2008, at US$736.8 million, only slightly bettered FY2003's mark of US$701.8 million.

If it fails to spark its existing product lines, the company will need to grow a new money tree. Creative's inPerson videoconferencing device launched early this year was touted as one such revenue-spinner, but this offering remains unproven.

Or perhaps Creative could consider diversification from its core business as a possible answer. This was what local tech neighbour and contract manufacturer Aztech did at the beginning of this year, when it ventured into the construction materials supply business. Lifted by this venture, Aztech's Q3 profits increased while the fortunes of its tech peers continue to head south.

Undoubtedly, such moves are likely to be opportunistic and risky - but opportunism could be exactly what Creative needs to boldly indulge in now, to jump-start its fortunes once again.