Wednesday, March 26, 2008

Is Creative in big trouble?

Creative Technology, which makes accessories for Apple's iPod, forecast the lowest sales in almost five years and said it will lose money on operations in the current third quarter.

Revenue may drop 18 percent to $150 million in the three months ending March 31, lower than an unspecified target, the Singapore-based company said in a statement. Creative said it expects to have an operating loss, or sales minus the cost of goods sold and administrative expenses, because currency exchange rates resulted in higher-than-expected expenses.

Chief Executive Officer Sim Wong Hoo, 52, has cut prices of the Zen digital music players by as much as half to revive sales amid waning consumer demand. Creative said it's also selling its headquarters in Singapore for S$250 million ($179 million) and other investments in a bid to boost profit.

“It's not surprising that the quarter is weak but it's even weaker than expected,” said Tan Ai Teng, a Singapore-based analyst at DBS Group Research, who has a “hold” rating on Creative. “It doesn't look particularly hopeful going forward and it's still going to be challenging.”

Creative reiterated it expects to be profitable in the third quarter. The maker of Muvo digital music players posted a net loss of $23.6 million on sales of $183.8 million a year earlier.

The company expects the sale of the headquarters to result in a S$200 million gain, which will be amortized and recognized over five years. Creative said it will rent the property from the unidentified buyer.

Will this one-off gain really help Creative in the long run?