Creative Technology Ltd - CIMB Research 2018-03-01: Breaking The Da Vinci Code

Creative Technology Ltd - CIMB Research 2018-03-01: Breaking The Da Vinci Code CREATIVE TECHNOLOGY LTD C76.SI

Creative Technology Ltd - Breaking The Da Vinci Code

  • Creative Technology showcased its Super X-Fi technology to both investors and media today.
  • CEO Sim Wong Hoo is convinced that Creative has found the Holy Grail of headphone audio.
  • We were impressed by Super X-Fi; we found ourselves unconsciously removing our headphones as we thought that the audio came from the external environment.
  • The Super X-Fi technology will be made free for consumers. Nonetheless, there is a gauntlet of possibilities for Creative to monetise its latest technology.
  • Creative Technology is trading at 2.9x trailing P/sales and 2.7x current P/BV.



Experiencing the magic of headphone holography 


What is Super X-Fi? 

  • The Super X-Fi (SXFi) is not a headphone nor a dongle nor software. It is a technology. Powered by a chip, the secret sauce lies in the algorithms that perform reverse computations to recreate the listening experience from a multi-speaker system in audio headphones. 
  • In fact, CEO Sim Wong Hoo is convinced that Creative has found the Holy Grail of headphone audio. He believes that once consumers experience the SXFi, they will not want to return to the old headphone experience, where the listening experience could be canned and constricted. In his words, “It’s like watching colour on TV; you won’t want to go back to black-and-white!” 
  • From a user’s perspective, we were impressed by the SXFi. During the user test experience, we found ourselves unconsciously removing our headphones as we thought that the audio came from the external environment. 
  • Also worth noting is that the SXFi won the prestigious AVS Forum “Best of CES 2018 Award” on its maiden outing at the world’s largest consumer electronics show in Las Vegas in Jan this year; it has furthermore been validated by industry expert reviews.
  • In terms of R&D spend, Creative threw in over US$100m over the past 20 years. Along the way, byproducts, such as the EAX sound-card and CMSS (Creative Multi Speaker Surround), were created. After umpteen versions, it can be said that the SXFi represents the realisation of a 20-year-old dream for Sim.

How much is the Super X-Fi? 

  • On its own, the Super X-Fi (SXFi) technology is free and available for consumers. By Jun 2018, consumers will be able to download the SXFi app, which contains the technology to recreate the listening experience from a multi-speaker system in audio headphones. 
  • Creative also plans to offer a wide range of products with built-in SXFi (including a US$150 dongle, headphones, software for cell phones, etc).
  • We note that the app will only be able to play downloaded content and does not work on other proprietary platforms, such as YouTube or Spotify. However, Creative is open to collaborating with digital content companies so that consumers can experience SXFi on different platforms. The company aims to have 50m users on its app in two years. Meanwhile, consumers can use the SXFi dongle to enjoy content from different digital media platforms.

How does the Super X-Fi work – the analyst’s experience: 

  • SXFi technology acknowledges that every person perceives sound uniquely based on our anatomical dimensions (the shapes of our heads and ears are all different). In principle, headphone audio should be customised to fit each person.
  • During the demonstration, photos of our face and ears were taken with a camera on a smartphone. An artificial intelligence (AI) engine within the SXFi app (installed on the smartphone) then maps how the distinct acoustics from an audio system will project sound to us.
  • After this, we experienced audio from a movie clip, a video game and a jazz tune. While listening on the three mediums, we alternated between a multispeaker system and headphones that were “wired” to our features.
  • Overall, we were impressed by the texture, immersiveness and realism of the audio from the SXFi headphones. We could not tell whether we were experiencing audio from a multi-speaker system or from the headphones.

We believe that Creative’s strategy in rolling out its latest technology is, in part, a reflection of its previous painful lessons. 

  • Looking to the Sound Blaster era – we estimate that at its peak, Creative commanded c.60% of the global market share for sound cards for personal computers – Creative possessively kept the technology in-house. By not selling chips or the technology behind the Sound Blaster card, Creative invited competition to fill the gap. Hence, Creative learnt that it is not able to do everything on its own.
  • Additionally, Creative Technology has, over the years, been involved in numerous lawsuits to protect its intellectual properties (IP). However, it found out that IP law has its limitations. This could also be why Creative is now sharing its technology and making it free, i.e. to dispel competition.
  • There could be a gauntlet of possibilities for Creative when it comes to monetising SXFi; here we offer our suggestions: 
    1. A giant technology company could acquire Creative for its SXFi technology 
    2. Creative could monetise its SXFi app user base once it hits critical mass 
    3. Apart from selling SXFi built-in products, Creative could work with other headphone manufacturers.


Company brief 

  • Creative is known for its Sound Blaster sound cards and is a leading player in digital entertainment products. Other products include speakers, headphones, amplifiers and converters and home-theatre systems. 
  • Founded in 1981 by Sim Wong Hoo and Ng Kai Wa (both were classmates in Ngee Ann Technical College), Creative went public in 1989 and became the first Singapore company to list on the US NASDAQ stock exchange. In 1994, Creative listed its shares on the Singapore stock exchange.
  • Creative released the Sound Blaster sound card in 1989, which went on to become the de facto sound card for personal computers. In 1999, it was the first company to produce and market the personal MP3 player. 
  • While Creative’s product was technologically superior, it lost out to new entrant, Apple (AAPL US, Not Rated). Unfortunately, the differences between the two products became a case study on the significance of marketing (early adopters of Apple’s iPod were already members of the cult of Steve Jobs), technological eco-system (users of iPod could download music directly from iTunes) as well as user-friendliness (iPod click wheel).
  • At its peak (in the early-2000s), Creative achieved revenues of over US$1bn; its share price crossed S$50 during the dotcom boom. 
  • Revenue dropped more than tenfold to US$70m in FY17. For 1HFY6/18, Creative is back in the black, with net profit of US$18.6m. However, this was mainly due to US$31.2m in settlement of patent lawsuits.


Valuation 

  • As Creative had a poor earnings track record in recent years, we look at its P/sales and P/BV for a sense of relative valuations. Creative is currently trading at 2.9x trailing P/sales (vs. its long-term average of 0.8x) and 2.7x current P/BV (vs. its long-term average of 0.9x).
  • Meanwhile, our CGS-CIMB small-mid cap technology coverage universe is trading at a simple average of 2.5x CY18 P/BV. We note that Razer (1337 HK, Not Rated), known for its premium gaming peripherals, is trading at 10.3x annualised FY17 P/sales and 2.1x current P/BV.









YEO Zhi Bin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2018-03-01
CIMB Research SGX Stock Analyst Report NOT RATED Maintain NOT RATED 99998 Same 99998



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