Creative Discusses Apple Deal in Earnings Call

When Creative released earnings, it was clear that the company is hoping to leverage the settlement and patenting agreement with Apple quickly. (

Creative was elusive about its deal with Apple when it was announced in August, but when the company released earnings Oct. 30, it was clear that it is hoping to leverage the settlement and patenting agreement quickly.

Creative posted a loss in reported earnings for first-quarter results of fiscal year 2007, which ended on Sept. 30. In a conference call Oct. 30, representatives spoke about leveraging the companys new relationship with Apple to meet its goal of profitability by the end of the year.

In August, Creative announced that it had settled a $100 million settlement with Apple, which also included a stipulation that Apple could recoup part of the Creative patent settlement if Creative was successful in licensing the patent to others.

Creative was not available to elaborate on the details of this plan back in August but a statement released Oct. 30 about its earnings sheds some light.

"In addition to the $100 million paid-up license we received from Apple for use of the Zen patent, the settlement provides us with a significant new market opportunity," said Craig McHugh, president of Creative Labs, on Oct. 30s conference call.

"We can now develop products to market to the tens of millions of iPod users through our participation in the Made for iPod program.

"This provides expanded market potential for our speaker systems, our earphones and headphones and our family if X-Fi Xtreme Fidelity audio enhancement products."

Creative posted sales of $241.4 million and a net loss of $21 million, compared to a net income of $0.7 million.

Loss per share was $0.25 compared to earnings per share of $0.01 for the same period last year.

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"In the first quarter, although we incurred an operating loss, we continued to progress on our plan to return to profitability in our second quarter," McHugh said. "We are projecting huge gross margins from our flash-based MP3 business."

Meanwhile, two weeks ago Apple announced profits of $546 million or 62 cents a share. While Creative hopes to be profitable by the end of the year, Apples profit increased by 27 percent compared to last year.

"Our settlement with Apple allows us to license our MP3 products to Apple, which we believe will allow us to post profits by year end 2006," McHugh said. "Anybody with an iPod can connect to an Xmod X-Fi Module, which will significantly increase their listening experience."

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