Creative SEC Filing For Fiscal Year 2007 ~ Creative Labs Zen MP3 Players Sound Blaster Card
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Wednesday, November 21, 2007

Creative SEC Filing For Fiscal Year 2007

Creative GigaWorks
Creative Labs is in the transitional period of shifting to high profit margin products such as speaker , iPod accessory and headphone area where it will hopefully churn out a higher profit. It is also streamlining its Zen MP3 player into a few profitable series such as Zen Stone Plus and flash-based, credit-card sized ZEN. There is a risk factor in doing this and may affect its sales margin. More of the other risk factors are discussed and mentioned in the full SEC filing.

Creative’s gross margins have fluctuated and can vary significantly depending on product mix and other factors. Creative has a diversified product portfolio of consumer electronics and peripherals for PCs and sells these products through a worldwide network of domestic and international distributors, retailers and OEM customers. Creative’s gross margins vary significantly by product line and customer type, as well as within product lines.

In fiscal year 2007, Creative’s gross margin was 19.4% compared to gross margin of 14.6% for fiscal year 2006 and 22.5% for fiscal year 2005. The fluctuation in Creative’s gross margins over the past three fiscal years was largely attributable to a change in the mix of products sold during those periods.

Sales of Creative’s audio products, including the Sound Blaster X-Fi family of sound cards, generally have higher gross margins than sales of its portable digital audio players, including the ZEN family of hard drive players and flash players. Over the last three fiscal years, sales of personal digital entertainment products, which include portable digital audio and video players, have increased dramatically while sale of Creative’s audio products have declined.

A continued shift in sales mix away from higher-margin audio products towards lower-margin portable audio and video players will adversely affect Creative’s future overall gross margin and operating margin.

In addition, Creative recorded a substantial write-down for inventories of components in the third quarter of fiscal year 2006, which also adversely affected its gross margin. Given the rapid and unpredictable pace of product
obsolescence in the consumer electronics and PC industries and fluctuations in the price of components, such as flash memory, the company may incur inventory and related charges in the future. Such charges have had, and may have, a material adverse effect on the company’s gross margin and operating margin.

Creative’s gross margins are generally lower for sales to OEM customers compared with sales to its retail customers.Increases in OEM sales or decreases in retail sales relative to total sales may also negatively impact Creative’s gross margins.

Full report on SEC filing for FY2007

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