Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)
TRANSCRIPT SPONSOR
Wall Street Horizon Logo

Creative Technology Ltd (OTCPK:CREAF)

F3Q07 Earnings Call

May 1, 2007 8:00 pm ET

Executives:

Phil O’Shaughnessy – Senior Director of Corporate Communications

Craig McHugh – President of Creative Labs

Sim Wong Hoo – Chairman of the Board, Chief Executive Officer

Ng Keh Long – Chief Financial Officer, Secretary

Analysts:

Ken Hock Lim – Credit Suisse

Carlos Bing – Mackenzie Bing Management[?]

Presentation

Operator

Good afternoon. My name is Katina and I will be your conference operator today. At this time I would like to welcome everyone to the Creative Technologies Q3 FY2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. Operator instructions. Thank you. Mr. O’Shaughnessy, you may begin your conference.

Phil O’Shaughnessy – Senior Director of Corporate Communications

Thank you. Good morning to those of you joining us in Singapore, and good afternoon and evening to everyone in the U.S. Thank you for joining us today. I’m Phil O’Shaughnessy, Creative’s Senior Director of Corporate Communications, and I would like to welcome you to Creative Technology's Q3 FY2007 earnings release conference call.

The press release can be downloaded from our website, which is creative.com. We are also offering a webcast of today’s call which you can access through the investor relations page on creative.com.

Today’s call will be hosted by Craig McHugh, President of Creative Labs. Craig will be joined on the call by Sim Wong Hoo, Creative’s Chairman and Chief Executive Officer, and Ng Keh Long, our Chief Financial Officer.

During our call today, Craig and the other participants who may be speaking on the call will, with the exception of historical information, be making forward-looking statements, including statements relating to gross margins, operating expenses, inventory, profitability, and the market potential for our products. These forward-looking statements are based on the information that is available to us as of today, and reflect management’s current analysis, belief, or expectations.

Actual results could materially differ for a number of reasons, including those detailed in today’s press release and in our filings with the Securities and Exchange Commission over the last 12 months. You’re urged to review the risk factors set forth in our press release and in our SEC filings, including our annual report on Form 20-F. Also, please note that Creative undertakes no obligation to update any forward-looking statement made in today’s conference call or in our press release to reflect events or circumstances that occur after today.

For today’s call, all results are stated in U.S. dollars. We will begin today with Craig McHugh providing a review of the results of Q3 FY 2007. We will then open up the call for questions and answers.

At this time, I would like to turn the call over to Craig McHugh, President of Creative Labs. Craig?

Craig McHugh, President of Creative Labs

Thank you, Phil. Revenues for Q3 were $183.8 million, compared to revenues of $225.7 million for the same quarter last year. Net loss for Q3 was $23.6 million, with a loss per share of $0.28, including restructuring charges of $3.5 million. This compares to a net loss of $114.3 million with a loss per share of $1.38 for the same period last year. Including one-time charges of $41.6 million, primarily related to goodwill and restructuring charges for 3D labs.

Let’s take a look at the Q3 results in more detail. Sales for our personal digital entertainment, or PDE category, which includes our MP3 players and web cameras, contributed 52% of total sales in the period. This compares to 68% of revenues last quarter and 60% of revenues from PDE in the same quarter of last year.

Revenues from our mp3 players were lower YoverY, primarily as a result of the following factors: lower average selling prices resulting from product mix and price reductions which were taken in the quarter as a result of market conditions and lower unit volume YoverY. Our audio category posted a modest gain YoverY, contributing 17% of sales for the period. This compares to 10%of sales last quarter and 13% of sales in the same quarter last year.

The growth in revenues YoverY in our audio category is primarily a result of the increased penetration of our extreme fidelity platform, Sound Blaster X-Fi in gaming and in media center PCs, in both retail and OEM. Our speaker business contributed 21% of revenues in Q3, compared to 14% of revenues last quarter and 17% of revenues for the same period last year. Revenues from all other products accounted for 10% of total sales for the period.

Looking at the breakdown of revenues by specific geographic regions, as noted in today’s press release, sales for Q3 in the United States and in Asia came in below our expectations. The Americas represented 32% of total sales, compared to 41% for the same period last year, and to 34% for the last quarter. Europe contributed 49% of total sales, compared to 38% for the same period last year and 51% last quarter. Asia contributed 19% of revenues, compared to 15% last quarter and 21% for the same period last year.

Our gross margin for Q3 was 21%, compared to 22% last quarter. Operating expenses for the period came in at $59.6 million, before approximately $3 million of restructuring charges. Including the restructuring charges, operating expenses for the period were $62.6 million. This compares to operating expenses of $71 million for the same period last year, excluding one-time charges for 3D Labs of approximately $37 million. Our operating expenses last quarter were $65.2 million before approximately $2.1 million in restructuring costs.

As part of our efforts to reduce our operating expenses to bring them in line with our revenue and gross margins, we reduced our worldwide headcount by approximately 10% at the end of the last quarter. The restructuring charges associated with the headcount reduction are included in the approximately $3 million that I just noted. We are targeting to reduce our operating expenses to a level of about $50 million by the end of our first fiscal quarter of FY2008.

Moving on to the balance sheet, we ended the quarter with $293 million in cash, compared to $234 million last quarter and up from $224 million for the same quarter last year. As we noted in today’s press release, after the close of the quarter, we utilized $75 million of the $293 million to pay down our $175 million syndicated term loan, bringing the total remaining to $100 million. As we made this $75 million payment in the current quarter, it is not reflected on the last quarter’s balance sheet and will be reflected on the current quarter’s balance sheet.

In Q3 we made significant progress toward our goal of reducing our inventory, coming in at $153 million, which is 24% below the previous quarter’s inventory level of $201 million and 45% below our inventory of $276 million for the same period last year. Our reduction in inventory, while providing other important benefits, was a key contributor in increasing our cash position to $293 million.

Day sales outstanding at the end of Q3 were 58 days, compared to 53 days last quarter and 53 days for the same period last year. Now, looking forward, key areas of our focus include: the successful introduction of important new products in the current quarter and in Q1 FY2008, positioning us for the holiday season; reducing our operating expenses to bring them to about $50 million by the end of Q1 FY2008; further improvement on our supply chain and procurement processes; returning to profitability by the second half of the calendar year and remaining so moving forward.

At this time, I would like to open up the call for questions and answers. Operator, please?

TRANSCRIPT SPONSOR

Wall Street Horizon Logo

Do you get frustrated during earnings season?

Have you had trades go south because of bad earnings dates?

We know what it's like. We’ve been there. We’re Wall Street Horizon and we work with some of the largest firms on Wall Street.

Founded by former Fidelity Investments executives, we understand the power of trading on good information and the pain and suffering of trading otherwise. We obsess about earnings and economic events calendars so you don’t have to. Accurate. On time. Guaranteed.

Let us help.

Get Smart

Get Wall Street Horizon.

View our Free 30-day trial for investment professionals

To sponsor a Seeking Alpha transcript click here.

Questions-and-Answer Session

Operator

Operator instructions. Our first question comes from K. Lim of Credit Suisse.

Ken Hock Lim – Credit Suisse

Hi Craigh, Ken Hock here. Could you just give us an idea of the new product launches which are coming up? I think so far we have seen a lot of headsets and webcams, but not much new mp3 players. Could we expect a new line up of mp3 players in the coming two quarters?

Craig McHugh

Ken Hock, thank you. As you know, typically we focus quite a bit on products and upcoming products in our conference calls. With the eminent release of some of our exciting new mp3 players, we wanted to wait for the press release and the global launch so we don’t want to go into depth on that. We do have something very exciting in the mp3 area in the upcoming weeks. I tried to give a little glimpse of that by saying it is one of the key focuses of the company – introductions in our key areas.

You are going to see some very exciting things we’re doing in mp3. We are also doing some very important announcements in the audio area, the speaker area and what we are doing in webcam. I believe we will position ourselves extremely well for the holiday and I ask you to look to our press releases in the upcoming few weeks to see some of the great things that we are doing, that I believe will have significant impact on our market position.

Ken Hock Lim – Credit Suisse

Are you able to share some general trends or features that would differentiate this new line of mp3 players?

Craig McHugh

Again I don’t want to go into specifics because we want to really focus on a global launch. It is coming up very quickly. We have looked at the market and at how our products currently compete with our Zen V or Zen V Plus – they are doing very well in the marketplace – and our high-end Zen Vision:M. We believe there are opportunities to expand that product line and significantly improve our competitive position against all the other players outside the Apple world, and allow us to increase our strong position there.

We continue to be number two in the world for both flash and hard drive players globally and we believe there is significant opportunity to improve that position. We are going to be expanding the breadth of our offering and we believe that the new products will actually increase the size of the overall market. I don’t want to go into too much depth right now, because there’s been quite a bit of speculation on the internet already, but again Ken Hock, this time I’d ask you to just be patient and give us a short period of time while we introduce some great new products.

Ken Hock Lim – Credit Suisse

Separately, on the restructuring charges, are those mainly over and done with or should we still expect more restructuring efforts to come through?

Craig McHugh

As we noted today, Ken Hock, our operating expenses came in at about $59.6 million excluding the restructuring charges in the period. Over the next two quarters, by the end of Q1 FY2008 we’re targeting to bring our operating expenses down to about $50 million. That is a reduction of just under $10 million approximately. I gave that as a guideline and I think that indicates that we are still focused very heavily on reducing our operating expenses as we go into the holiday. That is a key part of our plan, to return the profitability.

We have been prudent in our reductions to date so we do not impact some of the opportunities ahead. As we move to reduce those costs, there may be restructuring charges in the upcoming period. Last quarter there was approximately $2.5 million of restructuring charges for operating expense. This period I believe it was about approximately $3 million of operating expense. Those were to support the headcount reductions we made globally.

As I noted, it is important to understand that the large headcount reductions we did make last quarter were towards the end of the quarter primarily in March, so they wouldn’t have been reflected in the quarterly operating expenses because we had the staff for the majority of the quarter. Going forward, we will be able to realize some further operating expense reductions from those reductions. We’re also looking to other areas in the company. As we improve our productivity and efficiency, we will be able to reduce costs. Right now, we are not forecasting restructuring charges, but there could be restructuring charges as we drive down those costs in the upcoming two periods.

Ken Hock Lim – Credit Suisse

On the 10% headcount reductions, are you able to share what kind of absolute savings that would lead to?

Craig McHugh

We haven’t broken that our, Ken Hock, and that will be part of our efforts to get down to about the $50 million level. As I just mentioned, it would have had significant impact last quarter, because they were at the end of March, but that would be a key component of us driving down those expenses to the level I mentioned.

Operator

Operator instructions. Your next question comes from Carlos Bing from Mackenzie Bing Management[?].

Carlos Bing - Mackenzie Bing Management[?]

I wanted to find out if you believed that Walmart’s online offering, which compares to iTunes – will that be a source of opportunity for you?

Craig McHugh

Yes, in a couple of areas. I think if you have a chance to look at the site, you will see that we are prominently highlighted throughout their site. They’re a very strong retail partner of ours and we are very pleased with their offering in all areas of content. I think their customers have proven to be excited about their offering. Walmart is one of our strategic retail partners throughout the world. It gives us an opportunity to provide a complete solution to the customers in all content areas.

If we look at the Walmart online offering, I think it expands the capabilities that Creative has. They have a vast array of content partners. We are very excited about it short-term and what it could mean long-term. Based on the initial reception we have been able to see, it provides a strong opportunity for us. It allows our customers to have a great solution with our Zen and also have opportunities to easily access a wide array of content.

As you know, many people have credited iTunes as being a critical part of Apple’s strategy, but as we see now, key partners offering such great content, very good pricing and great services, as Walmart and some of our other partners, I think it allows us to have a complete solution for our customers. It is a critical component of our strategy going forward to support those customers and partners and to be able to take advantage of that. I believe that as they further invest in those services, it gives us a very strong footing going forward for the holiday season.

Carlos Bing - Mackenzie Bing Management[?]

As a follow up, do you see yourselves being in the stores as far as on display to buy a Zen product and other products in the next few months and hopefully by Christmas?

Craig McHugh

I’m not certain of the question. Is it whether we will have video offerings within Walmart?

Carlos Bing - Mackenzie Bing Management[?]

Yes.

Craig McHugh

Right now, they have our Zen V and Zen V Plus. Zen V Plus is video and they also have our Zen Vision:M. The Zen Vision:M is ideally suited because of the high quality of their video download. That is an area where we continue to highlight and focus with Walmart going forward. That is an area where we expect expanded opportunities.

Operator

We have no further questions at this time.

Craig McHugh

If there are no further questions, on behalf of all Creative I would like to thank you very much for joining us today in the US and this morning in Singapore. Thank you very much, and that concludes our call for today.

TRANSCRIPT SPONSOR

Wall Street Horizon Logo

Do you get frustrated during earnings season?

Have you had trades go south because of bad earnings dates?

We know what it's like. We’ve been there. We’re Wall Street Horizon and we work with some of the largest firms on Wall Street.

Founded by former Fidelity Investments executives, we understand the power of trading on good information and the pain and suffering of trading otherwise. We obsess about earnings and economic events calendars so you don’t have to. Accurate. On time. Guaranteed.

Let us help.

Get Smart

Get Wall Street Horizon.

View our Free 30-day trial for investment professionals

To sponsor a Seeking Alpha transcript click here.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Creative Technology F3Q07 (Qtr End 3/31/07) Earnings Call Transcript
This Transcript
All Transcripts