Creative Avoids Addressing Its Apple Problem (CREAF)

| About: Creative Technology (CREAF)

Creative Technology (OTCPK:CREAF), maker of the Nomad and Zen MP3 players, reported F2Q06 earnings late last week. Creative posted a net profit of $1.3 million (down from $11.8 million y/y), on revenues of $390.8 million. Sales in Creative's Personal Digital Entertainment section (which includes MP3s and constitutes 67% of their revenues) were up only 7% year-over-year, despite the incredible growth in that market.

In the conference call, Creative's President responded to an analyst's question on why Creative's numbers were nowhere near Apple's on digital music players:

Q - Richard Todaro, Kennedy Capital

Hi guys. Can you guys talk about how the new products are selling and maybe, like, retailers how they are receiving it? It seems like you guys do really well at the shows, but then the sales... when you get into the battle with Apple, you don’t seem to do as well. So how do you think your consumer and retailers are receiving the product?

A - Craig McHugh, President of Creative

If you look at, as we shared just few minutes ago our revenues for the quarter with the highest we’ve had in 5 years. Our sales were up in each of our key GAAP categories, our MP3 sales were up, our audio sales were up, our MP3 and PC speakers were up and our web cameras were up across the board. I think it reflects the excitement of the product line and how well we are positioned.

As you may have noted, from my presentation that we had a stellar quarter, a year Europe represented a very high percentage of overall sales and it did particularly well in retail. And if you can talk to any major retailers in the US if you look at our partners with MP3 with BestBuy, Circuit City and Wal-Mart, Fry’s Electronics, Staples, I think they will tell you they had just super holiday sell-through with our products. Anyhow with the effort by the major European retailers, dealers like Dixons, FINAC, Media Market in Germany, we had exceptionally strong sell-through, in the period. I think that’s why contributed to the revenues being up in each of the categories.

And I think if you look at the significance of CES there were 1000s of companies -- Sony was there, Samsung, LG all of those Japanese companies -- Panasonic, Toshiba and the excitement not just in our group, but I think the excitement we generated with the consumers will be reflected in our business going forward.

And being selective by the product decision, talk about an exciting product -- this was across all categories. The feedback we are getting from the Zen Vision:M is truly outstanding.... We are excited about what we are doing in retail. Our retail channel positions in Europe and US are very good right now. I think represent a very strong holiday sell-through.

So, the question which you mentioned. Apple, they had a large number of players sold, but we see that our MP3 and webcam represented a 68% of our total revenues, I think it reflects a very strong holiday season for Creative as well. If you go back to our previous quarter, we said we are going to focus on profitability in that category, we are going to focus on our margins in the category, and I think we have been able to achieve those -- strong sell-through, very good market share, improving our overall market position and perception and at the same time we aim to deliver highest revenues in five years.

It strikes one that, despite his verbosity, McHugh did not answer the analyst's question at all. The closest he came to answering it was stating that MP3 and webcams sales were 'up' and represented 68% of Creative's total revenues. OK, but what does that have to do with Creative losing badly to Apple in all market share metrics -- which was the analyst's question?

Here comes try number two from Todaro:

Q - Richard Todaro

Can you talk about from an investor’s standpoint, two things? One, you have Apple with all time highs here, I think from the US investor standpoint, are you out doing a road-show, are you meeting with investors, going to conferences, recruiting analysts, what are you doing to get the Creative story out in the US?

A - Craig McHugh

We are focused very heavily on our results right now. I think the beginning in the August timeframe we shared that, we’re going to return the profitability by the end of the year. We wanted to reduce our inventories, and we wanted to release a new family of products to holiday series, um, holiday period and we delivered on each of those. And our focus has been on delivering those results, being able to improve our profitability, improve our margins, and be able to I think, really raise the perception accretive in the Zen brand and launched the Soundblaster Stream Fidelity, we’ve been very busy doing that. Our focus going forward is the 5, the 4, 5 key strategic items I shared with you today and this call is really just a real open forum so our investors and the analysts can understand both our products, our positioning and the strength in these categories. So right now, that’s our key focus.

Did McHugh answer this question either?

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