Creative is talking DVD-ROM sales close to 1 million, on its own, in Q4. To big to believe??????????????????????
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Gross Margin Surge Nets Creative $51.6 Million for the Quarter; Company is Banking on DVD Sales for 10 Percent Plus Revenue Increase
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Creative Technology Ltd.s' [CREAF] stellar third-quarter earnings are an indication that building components for sub-$1,000 PCs is not the only way to profit, particularly if you can keep expenses low and gross margins high.
While PC makers selling through retail are struggling to sell high-end multimedia desktops in volume, Creative had a bang-up quarter, largely due to aftermarket sales of the peripherals that desktop manufacturers incorporate into their early adopter systems. And the company expects revenue gains from the sale of its second-generation DVD kit in the current quarter.
Despite relatively flat sales, net income shot up 252 percent to $51.6 million, compared to net income of $14.7 million for the same quarter a year earlier. The company's sales were $287.8 million compared with $284.0 million for the same quarter last year.
The net income increase does not include shares of 3Dlabs Inc. , which creative sold for $18.5 million to broaden its portfolio. After the sale, Creative owned 11.9 percent of that company compared to the 17.5 percent it owned last October after 3Dlabs initial public offering, according to 3Dlabs officials. Including the $18.5 million gain, net income for the quarter was pushed to $70.1 million, representing an overall gain of 378 percent.
The net income surge stemmed from cost savings and the fifth quarter of consecutive increases in gross margin, which jumped to 32.9 percent up from 19.3 percent for the same quarter a year earlier.
"They're selling a lot of the AWE64 at a high margin," said Jeff Lin, an analyst with Nation's Bank Montgomery Securities [NB], referring to the company's latest sound card offering.
The AWE64 product line was introduced about a year ago at Comdex and already has surpassed the company's flagship Sound Blaster 16 in revenue.
Craig McHugh, Creative's vice president and general manager, told Multimedia Week a significant cut in operational expenses came from a change in manufacturing. The company now houses sales and manufacturing under a single factory in Singapore as a way to "save costs per square foot." Creative previously rented space at several facilities.
Other savings came from leveraging R&D from companies Creative has investments in, including Cambridge SoundWorks Inc. and 3Dlabs, rather than taking on those costs in house.
"We're getting the greatest productivity i our history from our strategic relationships," McHugh said.
Serious About DVD
Creative launched its second-generation DVD Dxr2 upgrade kit for $379 ($120 less than its first kit) late in the third quarter. McHugh was unable to supply sell-through data but said two of the company's top five retailers have reported sales "better than their expectations."
Some of the revenues from the DVD kit have been offset by the money Creative has had to pay software publishers Electronic Arts Inc. [EA] and Monolith Productions to get exclusive DVD versions of their titles Wing Commader IV and Claw. McHugh said he could not comment on the financial relationship between Creative and the publishers.
McHugh expects revenues for the current quarter to reflect a 10 percent to 15 percent growth based on conservative sales of the Dxr2.
He described the company's position in DVD as a market force rather than a market enabler. Sim Wong Hoo, chairman and CEO, said "we will be relentless in this pursuit."
As far as OEM DVD agreements with PC vendors, McHugh said Creative's first commitment is to make sure the company can meet retail demand.
The company clearly has overcome the glut of CD-ROM drives from a year ago (see MMW, Aug. 19, 1996), and now has to grapple with the product transitions to PCI audio.
Oppenheimer & Co. analysts Robert Fagin and Lenny Brecken said as the industry moves away from Sound Blaster as the standard, Creative will have to compete with many different companies on a new playing field.
Facing Market Transition
"Now all you have to do is write to DirectSound, you don't have to write to Sound Blaster per se," Fagin said. "They're also facing competition from DSPless companies [those building audio chips without DSPs] using MMX to do a lot of the processing, and they're whacking prices."
Nation Bank's Lin said the company is pretty well positioned to make the transition and that the company's name, not just the Sound Blaster moniker, still carries a lot of weight with PC-savvy buyers at retail.
Look for Creative to debut PCI products at Comdex next month, including a motherboard connector that allows OEMs to add the technology while maintaining Sound Blaster compatibility. Sim Wong
Hoo said Creative has met with many Taiwanese companies that were worried about putting the chip on the motherboard.
"We have convinced most of them to put a connector onto the motherboard," he said.
Partly because of the investment necessary to transition to PCI, Oppenheimer expects the company's operating expenses to rise about $8 million in the fourth quarter, which could eat into profits. (Creative Labs, 408/428-6600; Natio's Bank; 415/627-2000; Oppenheimer, 212/667-7000; see MMW, March 10, for related story.) |
