By Susan Kelly December 1, 2004 -- Creo, Inc. (NYSE: CREO) recently announced its financial results for the fiscal year and fourth quarter ended September 30, 2004. Fourth quarter revenue was $167.1 million, an increase of 11.2% from the fourth quarter of 2003. The company reported a loss of $1.3 million for the quarter, a decrease of $3.7 million compared to earnings of $2.4 million in the fourth quarter of 2003. The loss per share was $0.02 per share in the fourth quarter of 2004, compared to earnings of $0.05 per diluted share in the fourth quarter of last year. Revenue in fiscal 2004 was $635.8 million, an increase of 10% from fiscal 2003, in line with company guidance. Earnings were $11.5 million for the year, up from $5.5 million in fiscal 2003. Earnings were $0.21 per diluted share for fiscal 2004, compared to $0.11 of earnings per diluted share in the previous year. “Creo's performance in fiscal 2004 establishes a strong foundation for growth in earnings and shareholder value,” said Amos Michelson, chief executive officer of Creo. "We doubled earnings and demonstrated tremendous growth in our first year as a digital plate vendor, exceeding our goal to increase consumables revenue by 50 percent. We also achieved our goal of 10 percent total revenue growth. All economic segments showed revenue gains over the prior year - with the most significant improvements in Asia-Pacific and in our OEM business.” Topics of this summary: Financial Summary Guidance Q & A Financial Summary Gross margin in the fourth quarter of 2004 was 40.7%, decreasing 4% from fourth quarter 2003. The cost of ramping up Creo's plate business to meet customer demand for digital plates, changes in product mix, and pricing pressures on CTP systems reduced gross margin in the second half of fiscal 2004. Gross margin in fiscal 2004 was 42.4% compared to 44.6 percent in fiscal 2003. Severance costs of $500,000 were included in cost of sales in the fourth quarter of 2004 and $1.0 million were included in fiscal 2004. Total operating expenses were $69.6 million for the fourth quarter of 2004, including the previously announced expenses of $2.6 million for restructuring and $1.8 million for severances and accelerated depreciation. Total operating expenses in fiscal 2004 of $266.3 million, including the previously announced expenses of $4.3 million for restructuring and $3.9 million for severances and accelerated depreciation, increased by 7.5% compared to fiscal 2003. Consumables revenue reached $24.3 million this quarter, an increase of 105.2% compared to the fourth quarter of last year and a 12.6% increase compared to the third quarter of 2004. For the year, consumables revenue grew by 62.3% to $76.8 million compared to fiscal 2003. Additional Reported Highlights: Creo signed an agreement with Xerox Corporation to resell mid-range and entry-level production color digital presses in Canada and the United States in January 2004. Together with Xerox, the company also introduced the industry's first fully integrated production workflow for digital and commercial printing. In July, Creo's Board established a Special Committee of independent directors charged with evaluating and assessing Creo's current business plan and considering a full range of strategic options with the objective of enhancing shareholder value. Creo's Board anticipates that the evaluation process will be completed during January 2005. Creo entered the plate market in September 2003 and has grown to be the fourth largest digital plate vendor in the world in just one year. In fiscal 2004, the company acquired two plate-manufacturing facilities - one in South Africa and the other in West Virginia - for an aggregate acquisition cost of $26.7 million, net of working capital. Creo-branded plates are now in use in commercial, newspaper and packaging printing in nearly every region of the globe, with approximately eight percent of existing Creo customers - and approximately one-third of new customers are using Creo plates. Guidance Creo officials state they it is expected to see another year of strong growth, and are expecting 10% growth of overall revenue in 2005 and a second year of 50% plus growth in consumables revenue. Creo will begin to see the impact of the cost-reduction initiative announced on October 6 reflected in increased gross margins and reduced operating expenses in the fiscal second quarter, with the full impact of the $24 million of annualized savings apparent in the third quarter. Creo is committed to achieving their target of 8% earnings before tax in the fourth quarter of 2005. The company provided the following outlook for the fiscal first quarter ending December 31, 2004: Revenue between $165 million and $170 million; Earnings per diluted share up to $0.04 per share, after approximately $0.02 per diluted share in restructuring costs to be paid in the first quarter of 2005 to complete the North American consolidation program Q & A As a result of competitors, Creo is seeing pricing pressure across all product lines and is responding by reducing costs. Relative to the agreement between Creo and Xerox, revenue is being seen already. The relationship is moving along as both sides expected. Creo gross margins are likely to be at their low point either now or in Q1 2005. This is a result of the demand at the West Virginia plant during Q4, which pushed costs into inventory. Specific R&D programs are designed to enhance the reliability of existing products in the field. To reduce the cost of service over time, R&D is necessary in the Services arena. Creo is developing a program relative to “Inventory Assist”. Creo will know in advance what inventory is needed by their customers. Relative to the North American Market, Creo is ensuring they have the right coverage by focusing their sales people in the right direction with a complete offering to respond effectively to competition from such companies as KPG, Agfa and Fuji. Creo’s CTP market share in North America was reduced in the first two quarters of 2004. However, it was regained in the last two quarters of 2004. Creo feels that they have one-third market share for the 8-page machine and newspaper machine. Relative to the 4-page devices, Creo feels they have 15% market share. Creo expects that their thermal plate business will return better than 20 points over time. Attach rate is increasing to about 40% relative to thermal plates. Creo feels that approximately 8% of their customer base is using their plates. The cost of aluminum is up about 9%. Aluminum makes up about have of the material costs for plates.