TORONTO, Aug 4 (Reuters By Jeffrey Hodgson) – Creo Inc. , a maker of printing software and
technology, found itself awash in red ink in the third quarter, hurt by foreign
exchange and restructuring charges, even as sales rose 9 percent.

The Vancouver, British Columbia-based firm warned it would face further
charges and lower margins in the coming quarter, a forecast analysts said would
disappoint investors.

“We’re not surprised that these numbers are coming in the way they are.
I think the street is going to be negatively surprised here,” said Todd Coupland,
an analyst with CIBC World Markets in Toronto.

“The biggest surprise I think for people is that the gross margin is coming
down and the operating expenses are rising, so the company is looking a lot less
profitable over the next several quarters.”

Creo reported a loss of $1.6 million, or 3 cents a share, in the quarter
ended June 30, compared with year-earlier net income of $2.8 million, or 5 cents
a share.

The company said revenues rose to $156.2 million from $143.5 million.

Analysts had expected a loss of 1 cent a share, including the charges, on
revenues of $155.5 million, according to Reuters Estimates.

Creo warned last month it would miss its previous earnings forecast due to
unusual charges. It said third-quarter profit would be cut by 5 cents a share,
resulting in a net loss of 1 cent to 3 cents a share on revenue of $156 million.

It said on Wednesday the loss included about 6 cents a share of after-tax
expenses. This included a $1.8 million charge caused largely by foreign exchange
losses, the result of the revaluation of Canadian dollar assets as the currency
weakened during the quarter.

Other charges included a restructuring expense of $600,000 as it scrapped
leases while closing some U.S. operations, and a non-cash intangible asset
amortization charge of $700,000.

“The results for the quarter were in line with what they’d already sort of
guided to in their pre-announcement, but guidance will certainly be taken as
disappointing, not so much on the revenue side but more on the cost side,” said
one Toronto-based analyst who follows the firm.

“It was surprising to hear that gross margins are declining to the extent
that they are, and that operating costs are not coming down like we had
expected.”

Creo said it expects fourth-quarter revenue of $163 million to $168 million
and earnings per share between nil and 4 cents.

“While we are confident about our topline growth prospects for 2005, we do
see some margin reductions over the next couple of quarters, due to pricing
pressure and product mix,” chief financial officer Mark Dance told analysts.

“We could see overall gross margins in the low 40s, lets say 41 to 43
percent, before moving back up to their recent historic ranges of 43 to 44
percent later next year.”

The earnings per share forecast includes about 1 cent of intangible asset
amortization and 5 cents of restructuring, retention and accelerated
amortization costs as Creo moves its U.S. distribution arm to Vancouver.

Analysts had expected a fourth-quarter profit of 8 cents a share on revenues
of $167.2 million REUTERS

? 2004 Reuters