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Creative Labs share surge after Apple pays 100 million USD
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Aug. 24 - Shares of Creative Technology Ltd., whose music players are outsold 10 to one by the iPod in the U.S., gained the most in six years after Apple Computer Inc. said it will pay $100 million to the company to end patent disputes.
Creative shares rose 17 percent to S$11.20 as of 2:14 p.m. in Singapore, paring its decline this year to 18 percent. The company said the payment will contribute to earnings this quarter, following losses of $127.1 million in the past six months. Apple agreed to market iPod accessories made by Singapore-based Creative.
``It makes sense to partner with Apple,'' said Jonathan Ng, an analyst at CIMB-GK Research Pte in the city-state, who upgraded the stock to ``trading buy'' from ``neutral.'' The settlement ``is a one-time payment, and Creative still needs to focus on improving its operating environment.''
Creative, which introduced a hard drive-based music player two years before Apple, will seek to license its technology for navigating songs on music players to other companies. The company said today it won't close any factories, predicting it will regain share in the music-player market even as Microsoft Corp. prepares to sell its Zune device this year.
``Apple provides us with a market of more than 50 million users and that's sharply larger than the market we were used to,'' Craig McHugh, president of Creative's U.S. unit, said in an interview from San Jose, California today. ``We're targeting to be No. 2 outside of Apple.''
Apple, based in Cupertino, California, said yesterday the agreement ends all legal disputes with Creative. The companies began suing each other in Texas, California and Wisconsin in April. They also filed complaints with the U.S. International Trade Commission in Washington, each accusing the other of infringing patents related to the devices.
Gains Pared
Today's advance in Creative's stock is the biggest since Feb. 8, 2000. The share gain added S$41.6 million ($26 million) to Chief Executive Officer Sim Wong Hoo's wealth. Sim, 51, owns a 30.5 percent stake in Creative and is Singapore's 29th richest person with a fortune of $155 million, according to Forbes Inc.
The stock rose a record 38 percent earlier today, before paring gains on concern the one-time payment may not sustain earnings. Creative is down 15 percent in Singapore this year, compared with a 4.8 percent advance in the Straits Times Index.
``Even though Creative and Apple have reached a resolution, it's very difficult to make a prediction on how much business a former foe will give it,'' said Gabriel Yap, a dealing director at Phillip Securities in Singapore. ``If Creative continues to spend $25 million to $35 million on marketing as they have done, the $100 million will just evaporate.''
Consecutive Losses
Creative had a loss of $12.7 million in the three months ended June 30 after posting a record $114.3 million loss in the preceding quarter. About 85 cents will be added to earnings per share for the quarter ending Sept. 30, the company said. That compares with a profit of $700,000, or 1 cent a share, a year ago.
``The fact that Apple has paid for a license from Creative will certainly put Creative in a stronger bargaining power to seek licensing fees from other players,'' said Lionel Tan, a partner at Singapore-based law firm Rajah & Tann who covers intellectual property.
The iPod is the best-selling music player in the U.S., according to NPD Group Inc. in Port Washington, New York. Creative, which ranks behind SanDisk Corp. in the U.S., has less than a 10 percent share, NPD said.
Apple has sold more than 58.9 million players since Chief Executive Officer Steve Jobs introduced the gadget in October 2001, including 8.11 million units in the quarter ended July 1. Creative said it's sold 15 million players since 1999.
The iPod, and sales of music for the device sold through the Apple's iTunes store, accounted for 45 percent of Apple's revenue last quarter, up from 38 percent a year earlier.
Dell Exits
Dell Inc., the world's largest personal-computer maker, last week scrapped its $99 DJ Ditty flash-based music player after failing to compete with Apple and instead will focus on reselling gadgets made by other companies such as Creative and SanDisk. Japan's D&M Holdings Inc., which made the Rio player, pulled out of the music player market in August 2005. The Rio was the first digital player introduced in 1998.
``Creative was very fortunate to have been granted this early patent,'' said Steve Dowling, an Apple spokesman, said in an interview. ``We just wanted to move beyond that and get back to innovating without several years of protracted litigation that would have cost as much as settlement.''
Portable digital music player sales are forecast to climb 40 percent to 187.7 million units in 2006 from 134.5 million last year, researcher Gartner Inc. said on June 22.
Accessories Market
Under the ``Made for iPod'' program, Creative will introduce products for Apple's player using its X-Fi technology, which enhances the sound quality on digital players, CD players and computers, Creative's Milpitas, California-based spokesman Phil O'Shaughnessy said in an interview. Speakers, earphones and headphones will be released for the holidays, he said.
The market for music player accessories, which include external speakers, cases and car stereo tuners, is worth between $2 billion to $4 billion a year, McHugh said. Creative will have to compete with Griffin Technology Inc., Belkin Corp. and Ten Technology to make iPod accessories.
Apple in 2001 proposed to license Creative's technology and buy a stake in the Singapore company's media player business, Creative said in court papers released in July. Creative said it turned down the offer and Apple introduced the iPod.
``We had a chance to become a worldwide global leader,'' McHugh said. ``Apple with their iPod had meteoric growth, and now it makes perfect sense to work with them.''
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