Creative Technology Ltd (SGX: C76) is a homegrown technology and electronic products company. Founded in 1981, the group was famous for launching the Sound Blaster Pro sound cards in 1989 that make it a global leader back then. Creative has a channel distribution network in more than 80 countries in Asia, North America, and Europe.
In its recent full-year 2019 (FY 2019) earnings report (the group has a 30 June fiscal year-end), Creative reported a 14% year-on-year decline in FY 2019 revenue as well as a loss of US$3.8 million. This was despite a litigation settlement amount of US$17.9 million recognised in the books, which meant losses would have exceeded US$20 million if this was adjusted out from the results.
With such dismal numbers, should investors be worried?
Unable to monetise Super X-Fi?
In January this year, Creative launched the Super X-Fi headphone holography technology, promising to revolutionise the way we use headphones. At CES 2019 (a consumer electronics fair), Creative won a record 10 awards from prominent consumer electronics media and triggered huge interest from OEM partners for this groundbreaking technology. In May 2019, Creative announced it was working with Clevo, a Taiwanese OEM manufacturer, as a hardware solution to Clevo’s customer base.
However, as of the date of writing, no specific revenue relating to licensing income has been recognised in Creative’s books. Neither has the group mentioned how or when this monetisation will occur. Though Creative won many awards and triggered a huge amount of interest, if it is unable to properly monetise this technology, investors will stand to gain nothing from it.
Lawsuit income drying up
Creative has been “enjoying” a few years of income garnered from successfully suing its competitors. Litigation settlement income came in at US$63.8 million in FY 2018 and US$17.9 million in FY 2019. However, investors need to be aware that this form of income is not sustainable, and Creative has most likely exhausted its lawsuit income starting from FY 2020.
Continued operating losses and cash burn
Creative continues to experience persistent losses and is burning cash every quarter. Though its cash balance is still healthy at US$107.8 million, the group has to find a way out of its current predicament in order to start generating consistent profit. The cash burn and losses will eventually put a strain on Creative’s balance sheet and erode its equity base further.
Time to sound the alarm
It’s certainly time to sound the alarm, as Creative has announced that it will continue to post an operating loss in the current quarter (Q1 2020). The initial euphoria from the Super X-Fi has all but fizzled out, and investors need to see some positive numbers before feeling confident once again.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.
Motley Fool Singapore 2019