Creative Technology Q308 Stock Analysis ~ Creative Labs Zen MP3 Players Sound Blaster Card
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Friday, April 25, 2008

Creative Technology Q308 Stock Analysis



Hi guys, this is the first time we are publishing Creative's stock analysis report by brokerage companies in SGX. After Creative Labs has pulled out of NASDAQ, there are very few stock analysis coverage on Creative Labs. Some of the Americans who are still shareholders of Creative Labs will be very interested in its stock performance and future stock price movements in the SGX market.

We hope by sharing you on all the stock analysis reports we can get, this will satisfy and attract more business readers, as well as our general Creative Labs readers.

Tell us if you liked what you read :)

Creative Technology Q308 results (Gregory)
Previous Day Closing price: S$6.10
Recommendation: SELL (downgraded)
Target price: S$4.34 (downgraded)


Lurching from hope to disaster
- Just one quarter after reporting its first operating turnaround, Creative reported an operating loss of $19.7m in 3Q08.
- Despite maintaining gross margins above 20%, revenue (-18% YoY, -43% QoQ) fell faster than operating costs.
- Adjusted for non-operating items (such as a $16m investment gain and a $3m non-cash charge for a stock gift from CEO Sim to employees), Creative suffered a net loss after tax of $10m.

Revenue headwinds in most categories
- Again, speakers was the only growth category (+9% YoY), with revenue in the other categories falling 23-26% YoY. Speakers accounted for 28% of sales, with audio accounting for just 16% of sales and PDE accounting for about half of sales.
- On a QoQ basis, PDE sales saw the largest drop (-52%); part of the reason being higher sales of flash-based MP3 players that are lower-ticket items than HDD-based players.

Poor forward guidance
- Creative also issued relatively poor 4Q revenue guidance, basically saying it expects no improvement in revenue (flat sequentially).
- Although it intends to cut operating costs further to be more in-line with its lower revenue and gross margin, it expects to incur restructuring charges in the next two quarters (4Q08 and 1Q09).

No positive momentum in sight
- In the last review, we were cautious about Creative's prospects despite management's optimism.
- Revenue momentum is obviously lacking. With the economic headwinds in its major markets ( Americas 29% of revenue, Europe 46%), it is obviously not easy to restart topline growth. European markets were particularly hard hit, with revenue down to its lowest level in more than two years.

Down to bare bone; something radical needed
- Despite extensive restructuring efforts in the past two years, which included spinning off production plants and adopting an outsourcing model, Creative now intends to cut overheads further which may affect operations.
- With R&D at a hefty 10% of sales, perhaps management should consider something more radical and split Creative into an R&D unit (privately held) and a marketing outfit (under listco).

SELL until we see a more fundamental rethink of the business
- We now forecast a $2m loss for Creative in FY08, instead of a profit. Recommendation is cut from HOLD to SELL, with fair value set at 0.8x book or S$4.34.

via Kim Eng Securities Research

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