Creative Technology (NASDAQ:CREAF), a maker of digital audio players and other audio-related computer peripherals, is set to report earnings Monday night. This Fool popped out his earbuds long enough to give you the lowdown on what to expect.

What analysts say:

  • Buy, sell, or waffle? Eleven analysts are keeping track of Creative, according to Thomson/First Call. Three of them have a buy recommendation, two are holding, and the other six want to sell. A Reuters poll shows exactly the same division of opinions. In our Motley Fool CAPS service, seven players are bullish on the stock, and five are playing the bear.
  • Revenues. Thomson respondents declined to issue any guidance for this quarter, but Reuters Estimates reports three brave souls with an average revenue estimate of $269 million, down from $280 million a year ago.
  • Earnings. Again turning to Reuters, two analysts have an opinion, one forecasting breakeven earnings and the other seeing a $0.22 loss per share. Last year, Creative produced a net profit of $0.08 per share.

What management says:
Creative's management team knows the company is in trouble, and has formulated a plan to get out of the current bind. Look at the table of historical margins below if you want proof of the need for change.

So the company is trying to return to 20% gross margins or better by the end of calendar year 2006, cutting off any unprofitable product lines, carving down operating expenses wherever possible, looking for more efficient supply chain and inventory management solutions, and trying to grow the high-end audio product market. It's a tall order, and Creative hasn't left itself much wiggle room to fail at any of these points.

What management does:
The nicest thing I can say is that Creative may have hit rock bottom already. The decline into the deep, dark dungeons of negative earnings saw a slight reverse last quarter, and gross margins improved as well. But the days of actual profits are but a distant memory.

Margins %

3/05

6/05

9/05

12/05

3/06

6/06

Gross

27.7

22.5

20.6

19.1

13.9

14.2

Op.

3.5

(0.4)

(1.4)

(2.5)

(9.7)

(10.2)

Net

3.5

0.0

(0.3)

(0.5)

(11.4)

(10.5)
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
OK, let's get to some good news. A few years ago, Creative filed for a patent on the user interface to its Zen music player. It turns out that Apple's (NASDAQ:AAPL) iPod interface was similar enough to that described in the patent for the courts to award Creative a victory in the patent infringement lawsuit that followed. So now Apple is paying $100 million to Creative for the right to continue using that solution, with incentive kickbacks to Apple if Creative can sign similar licensing deals with other digital audio player manufacturers.

Creative can also make and sell iPod accessories now, giving the company a new and substantial revenue potential. That settlement should contribute about $0.85 of earnings per share in this quarter, so the estimates above don't seem to have accounted for that item. Management is "very pleased to have reached an amicable settlement with Apple," while Apple CEO Steve Jobs thinks that "Creative is very fortunate to have been granted this early patent."

This news is very significant, but is it enough to make Creative an investable stock again? It's too early to say, pending further licensing agreements and a peek at how the iPod accessory opportunity works out. It's probably too early to expect a return to profitability anyhow, excluding the settlement.

Competitors:

  • Apple
  • SanDisk (NASDAQ:SNDK)
  • Micron (NYSE:MU)
  • Koninklijke Philips (NYSE:PHG)
  • Harman International Industries (NYSE:HAR)
  • Logitech International (NASDAQ:LOGI)

Find the next big thing in electronics, or biotech, or maybe nanotech, with the Motley Fool Rule Breakers team at your service. A free 30-day trial is but a few clicks away.

Fool contributor Anders Bylund holds no position in any of the companies discussed here, but his Creative Zen is glistening in the sun on his desk. You can check out Anders' holdings if you like, and Foolish disclosure is always a good call.