Creative 2007 Annual Report Download - page 2

2
CHAIRMAN’S MESSAGE
Dear Shareholders,
Fiscal 2007 was a very difficult and challenging year for Creative, yet we had a major success with a $100 million license from Apple
for its use of our ZEN® Patent. Our financial performance was negatively affected by certain market conditions during the year. For
the MP3 market in particular, we experienced intense competition which exerted severe pressure on our prices, reducing revenues
and gross margins.
Our primary objective during the year was to position the Company to return to profitability by the middle of our 2008 fiscal year by
focusing on several key strategic areas, to improve margins and reduce the overall level of operating expenses. These efforts covered
our product areas, where we focused on growing the higher-margin products, and operational improvements, including in the areas
of supply chain, procurement and inventory management. The result of these efforts is reflected in the financial results for the year
– improvements in gross margins and reduction in operating expenses, albeit with a reduction in revenue.
Sales for fiscal year 2007 were $0.9 billion compared to $1.1 billion for the fiscal year 2006. Gross profit as a percentage of sales
was 19% in fiscal 2007, compared to 15% in fiscal 2006. Net income for fiscal 2007 was $28 million, compared to a net loss of
$118 million in fiscal 2006. Net income for fiscal 2007 included a $100 million paid-up license from Apple for its use of the ZEN
Patent in its products, while net loss for fiscal 2006 included net investment gains of $19 million and one-time charges of $42 million
primarily related to goodwill and restructuring charges for our 3Dlabs subsidiary.
During the year we achieved a major success with the ZEN Patent with the $100 million payment from Apple as part of our broad
settlement, which includes a license for Apple to use the ZEN Patent in their products. In addition, we have also joined Apple’s “Made
for iPod” program, under which we are able to make and sell accessory products such as speaker systems for Apple’s iPod players.
We have continued to explore the opportunities that our U.S. patent for the user interface for portable media players (which we refer to
as the “ZEN Patent”) affords us, including licensing programs, partnerships and potential legal remedies. The ZEN Patent was awarded
to Creative in the previous fiscal year for our invention of the user interface for portable media players, including many of the Creative
ZEN and earlier NOMAD® Jukebox MP3 players, and found in some competing players, such as the Apple® iPod® products, and
certain cell phones with music functions. The ZEN Patent covers the user interface that enables users of portable media players to
efficiently and intuitively navigate among and select tracks on players which store large numbers of songs.
On the product and technology front, we have focused on growing our audio business by expanding the market for X-Fi Xtreme
Fidelity® audio beyond sound cards and the PC; growing our speaker business in the high-growth and higher-margin segments of
the market, including docking and portable speaker systems for the MP3 digital audio market, headphones and lifestyle speakers for
the home; and streamlining our MP3 player business with a focus on a few strategic high-volume and profitable products instead of
the large number of product offerings we had. Our participation in the “Made for iPod” program has also provided significant new
market opportunities for our high-growth and high-margin businesses, such as docking and portable speaker systems, earphones and
headphones, and our newly introduced X-Fi-enabled audio enhancement products.
In the audio business, as I have mentioned last year, following the introduction of what I believe will be the future direction of audio
– the new Xtreme Fidelity audio standard, and the launch of the Sound Blaster® X-Fi™ sound cards in the previous year, we saw
tremendous potential growth opportunities for expanding X-Fi beyond the PC space into the consumer electronics and cell phone
markets, and beyond the X-Fi sound cards into speakers and headphones, portable music and video players, digital entertainment
products for the living room, and other X-Fi-enabled audio enhancement products. X-Fi can provide these products with ground-
breaking audio technologies to dramatically improve the audio experience with music, games, movies and audio creation.
During the year, we introduced the first of such X-Fi audio enhancement products and followed on with a whole range of these
products covering X-Fi modules, X-Fi docking devices, X-Fi docking speakers and X-Fi headphones. Products introduced to date
include the Xmod, Xdock, X-Fi Wireless Receiver, Xmod Wireless, X-Fi Sound System Z600, X-Fi Sound System i600 for iPod and
Aurvana X-Fi Headphones.
The Xdock is an X-Fi Dock for iPods that allows you to play back music wirelessly in any room of the home. When docked with an
iPod that connects to the home entertainment system or speaker system, it up-converts the music from the player in real-time to a
quality beyond CD quality - to 24-bit Xtreme Fidelity, a dramatic improvement over the sound of compressed MP3 music. In addition
to playing music through the home entertainment system, it wirelessly broadcasts the music through the home to X-Fi Wireless
Receivers, playing music from the player in Xtreme Fidelity. The Xdock has been certified by the Made for iPod program, giving us
the first Xtreme Fidelity solution that we can market to a huge base of iPod users.