Creative Labs Zen MP3 Players Sound Blaster Card

Creative is still bleeding after so many quarter results. This time, Q02FY12, the loss was US$33.9 million. Creative blames it on the installation and operation of a wireless broadband network in Singapore by a subsidiary QMax Communications Pte Ltd (“QMax”). QMax suspended the wireless broadband project as the vendor for the equipment has failed to deliver on the key network performance requirements set out in the relevant supply contract. Creative will be sueing the vendor for the damages incurred.

Net Sales
Net sales for the second quarter of FY2012 decreased by 14% compared to the same quarter in FY2011, and net sales for the first half year of FY2012 decreased by 13% compared to the same period in FY2011. Revenue was lower in the second quarter and first half year of FY2012 as the Group continues to be affected by the difficult market for its products, particularly for the personal digital entertainment products.

Gross Profit
Gross profit margin was 20% in the second quarter of FY2012 and 19% in the first half year of FY2012 compared to 26% in the second quarter of FY2011 and 25% in the first half year of FY2011. Gross profit margin in the second quarter and first half year of FY2012 was lower due to write-down of inventories.

Net Loss
Net loss for the second quarter of FY2012 was US$33.9 million compared to net loss of US$10.9 million in the second quarter of FY2011. Despite the decrease in sales, there was an improvement in operating results for the second quarter of FY2012 compared to the same period in the prior year. While gross profit was lower by US$5.6 million, operating expenses comprising selling, general and administrative expenses and research and development expenses decreased by US$10.2 million in the second quarter of FY2012 compared to the second quarter of FY2011. However the Group’s results in the second quarter of FY2012 was negatively impacted by other losses (net) of US$23.6 million as explained below.

Net loss for the first half year of FY2012 was US$63.4 million compared to US$14.5 million in the first half year of FY2011. Sales have decreased and gross profit was lower by US$10.8 million for the first half year of FY2012 compared to the same period in the prior year, but operating results for the Group has improved due to a decrease in operating expenses by US$14.8 million. The Group’s results in the first half year of FY2012 was negatively impacted by other losses (net) of US$35.0 million as explained below.

Selling, general and administrative expenses in the second quarter and first half year of FY2012 decreased by 26% and 15%, respectively, compared to the same period in the prior year. The decrease in selling, general and administrative expenses was mainly a result of the cost cutting actions taken in FY2011.

Research and development expenses in the second quarter and first half year of FY2012 decreased by 38% and 32%, respectively, compared to the same period in the corresponding year. The decrease in research and development expenses was mainly a result of cost cutting actions taken in FY2011. The Group will continue to invest in product research and development in areas that are strategic to the Group, cutting back research and development spending only in product areas that are not strategic to the Group.

Depreciation and amortization was US$0.7 million and US$2.4 million in the second quarter and first half year of FY2012, respectively, compared to US$1.8 million and US$3.6 million in the same periods in the prior year.

Deprecation and amortization was lower in the second quarter and first half year of FY2012 due mainly to disposal of a wholly-owned manufacturing subsidiary in China in the fourth quarter of FY2011 and assets being fully depreciated.

Other losses (net) of US$23.6 million in the second quarter of FY2012 comprised mainly impairment charges of US$15.6 million for equipment and intangible assets and provisions of US$6.5 million for commitments for other expenditures and obligations, pertaining to the installation and operation of a wireless broadband network in Singapore by a subsidiary QMax Communications Pte Ltd (“QMax”).

At the end of the second quarter of FY2012, QMax suspended the wireless broadband project as the vendor for the equipment has failed to deliver on the key network performance requirements set out in the relevant supply contract.

The Company and QMax have given notice to the vendor to terminate or rescind the supply contract on the grounds of material breach of the contract and/or misrepresentations by the vendor. The Company and QMax have also recently initiated legal proceedings against the vendor to recover damages and all losses suffered in relation to the wireless broadband project, after discussions with the vendor failed to reach a satisfactory conclusion. Pending the outcome of the legal proceedings, for the Group’s results in the second quarter of FY2012, full provisions have been made for the impairment of equipment and related intangible assets for the project, as well as commitments for other expenditures and obligations to third parties relating to the project. No recognition has been made in the accounts for any recovery of compensation for losses suffered and damages that the Group is seeking from the vendor.

Other gains (net) of US$2.6 million in the second quarter of FY2011 were due mainly to foreign exchange gains of US$2.6 million compared to a foreign exchange loss of US$1.5 million in the second quarter of FY2012.

Other losses (net) of US$35.0 million in the first half year of FY2012 included impairment charges of US$15.6 million for equipment and intangible assets, provisions of US$6.5 million for commitments for other expenditures and obligations as explained above, US$10.2 million foreign exchange losses and a US$3.1 million impairment loss on investments due to adverse business conditions in certain investee companies. Other gains (net) of US$15.7 million in the first half year of FY2011 were due mainly to foreign exchange gains of US$15.8 million.

The functional currency of the Company and its subsidiaries is predominantly the US dollar and accordingly, gains and losses resulting from the translation of monetary assets and liabilities denominated in currencies other than the US dollar are reflected in the determination of net income (loss). The exchange differences were due mainly to the cash and cash equivalent balances held by the Group. Cash and cash equivalents were held mainly in Singapore dollar, with the balance mainly in US dollar, Euro, British Pound and Japanese Yen. The exchange loss in the first quarter of FY2012 was due mainly to the significant depreciation of Singapore dollar and Euro against the US dollar, and in the second quarter of FY2012, Euro continued to depreciate against the US dollar. The exchange gain in the first quarter of FY2011 was due mainly to the significant appreciation of Singapore dollar and Euro against the US dollar, and in the second quarter of FY2011, Singapore dollar continued to appreciate against the US dollar.

BALANCE SHEETS
The decrease in financial assets, available-for-sale as at 31 December 2011 was due mainly to a US$5.9 million fair value loss on revaluation of investments as a result of the decline in global stock markets and a US$3.1 million impairment loss on investments charged in the first quarter of FY2012. The decrease in property and equipment and intangible assets was due mainly to the impairment charges pertaining to the wireless broadband project (as explained above). The decrease in other non-current assets was due mainly to the utilization of security deposit for the payment of the Group’s headquarters office building rental. The decrease in inventories was in line with the lower level of sales. The decrease in other current assets was due mainly to a US$2.2 million decrease in balances due from associated companies and US$0.8 million decrease in security deposits and prepayments.

We want to hear from you, please feel free to let us know in the comments section below. Read more!