Creative 2004 Annual Report Download - page 4

2
Chairman’s Message
Dear Shareholders,
In my message to you last year, I shared with you that Creative was at an inflection point. I said that “the Personal Digital Entertainment
(PDE) market that we pioneered five years earlier has finally achieved ‘critical mass’”, and “has reached a self sustaining rapid growth
stage and is about to explode”. The PC and consumer electronics markets were also at their inflection points, with the two giant markets
converging on the new PDE market and moving towards a head-on collision to battle for the dominance of this new space.
Over the past year, the PDE market has indeed exploded, especially for the MP3 digital audio segment. Major players, incumbents as
well as new players, from both the PC and consumer electronics market have been drawn in by the attractive opportunities in this nascent
and potentially huge, but highly competitive market. Competition is expected to become more intense as even more entrants are drawn
in, but we expect the market to consolidate soon to a few major players. In fact, the consolidation has already begun.
On Creative’s part, we were well positioned and fully prepared to take on this new and exciting challenge. We had over the past year
continued to prepare ourselves for the challenge of extending our unrivaled leadership position in the PC audio arena into the highly
competitive PDE market, focusing attention especially on the MP3 digital audio segment. We continued to acquire new capabilities in
PDE, focusing our R&D resources on innovation in both technical product design and visual ID of our products (the results of which
you can see on the cover pages of this Annual Report), which are key to the PDE market, as we significantly increased the overall number
of product offerings.
I am pleased to report that Creative has lived up to the challenge to take advantage of this new inflection point and we are ready to enter
a new era of rapid growth on the back of the exploding MP3 digital audio and PDE markets.
We have started to reap the benefits of our hard work over the past few years to remodel our product lines and businesses, and to invest
in expanding our product development capabilities in PDE. We returned to revenue growth in fiscal 2004, with significant growth in
revenues coming from the PDE product category, and continued to achieve operating profits in all four quarters of the fiscal year.
Sales for fiscal year 2004 were $815 million, an increase of 16% compared to $702 million for the fiscal year 2003. Gross profit as
a percentage of sales was 35% in fiscal 2004, similar to that achieved in fiscal 2003. Net income for fiscal 2004 was $134 million,
compared to $23 million in fiscal 2003. Net income for fiscal 2004 included net investment gains of $73 million and a tax write-back
of $12 million, while the net income for fiscal 2003 included net investment losses of $6 million. Excluding these investment gains/
losses and tax write-back, the results would have been a net income of $49 million for fiscal 2004 and $29 million for fiscal 2003.
We finished the fiscal year with strong growth in sales, particularly in the third and fourth quarters where we achieved exceptionally strong
growth of 26% and 35% respectively year-over-year. This strong growth was driven largely by the PDE product category, which includes
our Zen and MuVo MP3 digital audio players and our family of webcams, with PDE sales increasing by 115% for the fiscal year. For
the third and fourth quarters, the growth rate for PDE sales was a phenomenal 121% and 219% respectively year-over-year. Within
PDE, the growth rate for MP3 digital audio players was even more phenomenal, with sales in the fourth quarter growing to almost four
times year-over-year.
PDE products became the largest revenue contributor in fiscal 2004. Sales from PDE as a percentage of total sales increased to 33%,
compared to 18% in the previous year. Its contribution continued to increase in each quarter during the year and rose to a record high
of 44% in the fourth quarter.
Reflecting our continued success in moving beyond the PC market and into the consumer electronics market, revenue contribution from
the sale of products outside the PC box grew to 64% of total revenues in fiscal 2004, and reached a record high of above 70% in the
fourth quarter. With the large majority of our revenue coming from products functioning external to the PC box, we are no longer solely
dependent on the PC market and add-in cards.
In achieving the above accomplishments, we have significantly expanded the breadth of our product lines over the past year, with the
introduction of more new products than in any other period in our history, particularly in the PDE category.
New products in the PDE category include MP3 digital audio players in all four segments of the market, i.e. flash memory, 1.0-inch
microdrives and 1.8-inch hard drives, as well as the personal media center (PMC) players.
Flash memory MP3 digital audio players included the MuVo® NX, TX and TX FM range of products. The latest MuVo TX FM comes with
a choice of 128MB, 256MB and 512MB capacities, a super fast USB 2.0 flash drive, and FM radio functionality in a tiny form factor.
US report 04-6 22-9 27/9/04, 3:40 PM2
Black