Phillip on the Ground – Creative Technology 2019 AGM October 31, 2019 144

We recently attended Creative Technology AGM 2019 AGM held on 30 October 2019, below are some key highlights:

 

Distribution: Traditional retail channel was the strength of Creative in the past. But this channel has become expensive and losing market share. They want higher margins from product makers to compete against lower-priced internet channel. Creative will look to grow own online stores. Sales have been down in part due to decision to scale down retail presence.

Selling to OEMs: a) Headphone OEM is a large opportunity but they view Creative as a threat since also a headphone maker. Creative needs to build market themselves; b) Handset OEMs: can provide the software and earn pure license fee, but some Asian phone makers do not value (i.e. pay) software highly.

Marketing challenge: Need to download Super X-FI app and take 3 pictures (right/left ear and face) to enjoy the full benefit of the technology. The algorithm will present the best music based on head size and shape. Super X-FI technology cannot be just left on the shelf, it needs a demo and customization to enjoy the full benefit.

Creative Super X-FI AMP: Because the product is pricey at US$150, the typical buyer are those with very expensive headsets eg US$500 headphone, etc. This limits the market size to very high-end users. To sell the AMP, Creative also certifies other headphone makers. This is a very expensive process. A better strategy could have been to sell the headphone first.

 

[The SXFI AMP – a finger-sized device that incorporates a powerful headphone amplifier capable of driving 600-ohm studio-grade headphones with our very own Super X-Fi processor chip.]

Competition: Sony has launched a similar product (360 Reality Audio) where need to take pictures of the ear to get the full benefit of the technology. Sony solution appears only for their own content.

Legal: No major outstanding lawsuit at present.

CES: Each media outlet especially the larger one will provide an award. Super X-Fi won 15 awards for a single product. [During the Sound Blaster days, there were only 3 major technology magazines – PC World, Byte and PC magazine. Creative gained worldwide publicity when their product was featured in PC World. The whole media landscape has changed and harder to gain attention].

China: China will be the key focus market. The key products to sell into China will be Super X-FI headsets.

Sound Blaster Soundcard: Creative is dominant but a niche market because users ultimately need to be an enthusiast that requires opening the PC to install. Sales might be affected by higher tariffs imposed by the US on Chinese imports. Creative needs to raise prices to pass on the higher tariff.

 

Comment

A disclaimer, Creative is my favourite headset brand for value and quality. But the outlook for the company appears challenging. It looks like back to the marketing drawing board for Super X-FI with China domestic market the key focus. Excluding the litigation, Creative net loss is around US$20mn and operating cash used of around US$25mn in FYJun19. Net cash of US$108mn should sustain the company in their pursuit of marketing Super X-Fi more aggressive as the window of opportunity is unclear.

 

# Phillip Securities Research does not have any research coverage or recommendation on SPH. The article reflects the writer own views.

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Paul Chew
Head of Research
Phillip Securities Research Pte Ltd

Paul has almost 20 years of experience as a fund manager and sell-side analyst. During his time as fund manager, he has managed multiple funds and mandates including capital guaranteed, dividend income, renewable energy, single country and regionally focused funds.

He graduated from Monash University and had completed both his Chartered Financial Analyst and Australian CPA programme.

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