Misjudging of the competitive digital music player and computer audio market by management at Creative Technology Ltd. meant the company barely managed to make any money in its last financial year despite strong sales growth, the company said Thursday.
The Singapore-based maker of digital audio players and PC audio components said total sales for its financial reporting year ended June 30 doubled to US$1.2 billion compared to a year earlier, but net profit crashed to $0.6 million from $134.2 million in the previous year.
In the April-June period, its fourth quarter, stiff competition in the MP3 market caused prices to crumble, hurting Creative. The company posted a loss of $31.9 million as sales dropped to $305.4 million from a record $333.8 million in its previous quarter.
“In the fourth quarter, although we increased overall revenues 51 percent year-on-year and unit sales of our MP3 players were up 260 percent year-over-year, we had initially set higher targets for unit volume and average selling prices for MP3 players than we achieved in the period,” said Craig McHugh, president of Creative Labs Inc., the U.S. subsidiary of Creative Technology, in a conference call with analysts.
The average selling price was hit by fiercer than expected price competition in the market, said McHugh. As an example, the price of its popular Zen Micro player fell by about $40 during the April to June quarter, he said.
“The lower than expected selling prices for our MP3 players were the result of price reductions we needed to take in the period to respond to large price reductions by competitors in the MP3 player market,” said McHugh. He later identified price cuts by market-leader Apple Computer Inc. as being the main reason that Creative had to lower its own prices.
Slower than hoped for sales of players also meant the company was left with more products and components on hand than it had anticipated. With prices of components falling, particularly those of flash memory and hard-disk drives, the company had to write-off about $20 million of inventory, said McHugh.
Looking ahead, the company wouldn’t break out revenue or profit targets for the coming months but McHugh said he expects Creative to return to profitability by the end of the calendar year.