Creative sees the light, thank you for your patience and wants to do an Adidas

Dear Shareholders,

Creative is a company that is known to thrive in adversity. The adversities we are now facing, both internally and externally, will serve to propel us forward, albeit more carefully.

We have a very clear vision of what we want to achieve. We just have to be a lot more focused. We are finally seeing the light ahead of us. The path ahead could undoubtedly still be thorny and challenging, but we have the technology and financial resources to clear the way.

The vision I am talking about is to create a totally new Creative, with a new product line and a new business model, whilst leveraging on the technologies we have mustered over the years, which will again see Creative set a new trend in the industry and open up new opportunities for all.

I am very excited about this new vision, which we will unveil in the next quarter, and anxiously awaits to tell you about it.

Let me now give you a recap of the financial performance for the past fiscal year.

Fiscal 2008 continued to be another extremely difficult and challenging year for Creative.

We had planned to focus on returning to profitability by focusing on several key areas on both the product and operations fronts.

While we started the fiscal year making significant progress in such areas of focus, our plans were shortly thereafter affected by the adverse and uncertain macroeconomic conditions, starting with the sub-prime and housing problems in the US. The ensuing turmoil has during the fiscal year extended to cover other markets, and developed into the current crisis in the global financial markets. These uncertainties have also exacerbated problems facing our products in the weakening US consumer market.

These negative market developments have caused a reduction in revenues and adversely affected planned improvements in margins. In response to these developments, in the second half of the fiscal year, we have taken action to restructure the company with a series of cost-cutting measures to streamline the business operations of the company and reduce operating expenses, the result of which is reflected in the financial results for the year.

Sales for fiscal year 2008 were $737 million, a reduction of 19% compared to $915 million for the fiscal year 2007. Gross profit as a percentage of sales was 22% in fiscal 2008, compared to 19% in fiscal 2007. Net loss for fiscal 2008 was $20 million, compared to a net income of $28 million in fiscal 2007. Net loss for fiscal 2008 included $12 million of restructuring charges, while net income for fiscal 2007 included a $100 million paid-up license from Apple for its use of the ZEN Patent in its products. Creative sold its headquarters building in Singapore, Creative Resource, in June 2008 at a sale price of $181 million, with a leaseback of the whole building for a period of five years with an option for additional periods of three years and two years. Creative made a gain on the sale of the building of $148 million. Although the sale was completed in June 2008, and legal title has been transferred to the buyer, and sale proceeds have been received, for US GAAP accounting purposes, this sale has not been recognized in the accounts for fiscal year 2008. In accordance with US GAAP, the gain on sale of building will be recognized in the accounts only at the end of the initial five year lease term.

In July 2008, Creative repaid the entire $100 million outstanding balance of its syndicated term loan. With this repayment, Creative is now practically debt-free, with no outstanding bank borrowing. This has positioned us well to take advantage of the opportunities offered by the new product line and business model that I mentioned earlier.

Finally, I would like to thank all of you for your patience with Creative. We need this wide breathing space to prepare the company for the exciting opportunities ahead. I believe it will be something you will be very proud of.
To Believe in the Impossible.

Thank you.

Sim Wong Hoo
Chairman & Chief Executive Officer

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Creative's 2008 Annual Report is indeed a breath of fresh air. Not only does it spot an au natural cover of a rain forest, even Sim is going all ZEN on us. Despite measures to streamline its operation and return to profitability, unfavourable macroeconomic conditions and adverse market development has caused Creative to suffer a net loss of USD$20 million. Admitting that Creative has been facing adversities both internally and externally and that "2008 continued to be another extremely difficult and challenging year for Creative.", Sim remain confident that Creative has the financial resources and technology to make it throuh the rain. Sim is also going to create "a totally new Creative, with a new product line and a new business model". "We are finally seeing the light ahead of us.", Sim prophesied "I believe it will be something you will be very proud of. To Believe in the Impossible." As long as it's not moving towards the light Sim, I'm all for it.

Reading between the lines:

"Creative is a company that is known to thrive in adversity. The adversities we are now facing, both internally and externally, will serve to propel us forward, albeit more carefully."

Creative created a fantastic PC that had sound, graphics and a Chinese Operating System called the CUBIC CT in 1986 which failed badly because it was simply a product "5 years ahead of its time". In 1996, Creative lost some USD$56million when the CD-ROM market crashed. Apple robbed Creative off it's number 1 position in the MP3 market although Creative has a head start with the NOMAD. As I have said previously, "At the end of the day, the fact that we have the courage to still be standing is reason enough to celebrate." I'm very proud that Creative has never given up and look where it is today.

"a totally new Creative, with a new product line and a new business model,"

To recreate a totally new Creative, obviously you have to start from the bottom of the company hierarchy. I'm of course referring to the Sales and support staff. I have heard countless complains about rude sales staff at the Creative HQ in Singapore and mediocre after sales/ RMA service overseas. This point has been raised from time to time and it seems that nothing much is being done. Hopefully someone from up above (where the light comes from) sees this and do something to improve the situation. We have seen Creative moving away from the low-margin, throat cutting MP3 market into other areas like video capturing/conferencing. inPerson and Vado marks Creative's re-entry into the imaging capturing market. I see the Vado as another potential flagship product for Creative as it's highly affordable and there's an actual demand for it in the market. While with inPerson, it has already created a new business model by charging a monthly subscription fee. This seems to be a more lucrative and sustainable business model compared to one where a customer purchase a product, and no revenue is generated further. I see Creative heading towards this direction. Could a new product line be gaming consoles with subscription (like Xbox Live?) or maybe a ZEN Market place?

"Finally, I would like to thank all of you for your patience with Creative."

It's very comforting to hear something like this coming from a CEO. It's like saying: "I know we haven't been performing up to expectations but thanks for sticking with us. Rest assured things are changing for the better!"

"I believe it will be something you will be very proud of. To Believe in the Impossible."

"We are so going to kick Steve Jobs's ass and dethrone iPod! "

What do you think of Sim's message in the Annual Report? Tell us in the Comments Section below!