By Jennifer Tan, Reuters

SINGAPORE, Oct 24 (Reuters) - Singapore-based Creative Technology Ltd., whose Nomad and Zen MP3 music players aim to compete with Apple`s iPod, probably swung to a quarterly loss as intensifying price competition squeezed its gross margins.

Christmas season sales may help return Creative to profit in the quarter ended December, but it faces an uphill battle making headway against the market dominance of Apple Computer Inc. , with some analysts forecasting more red ink and a weaker balance sheet ahead.

Analysts predict a net loss when the company reports earnings for the July-September quarter on Wednesday.

Apple upped the stakes in September with its pencil-thin iPod nano, which uses flash memory chips to store photos and up to 1,000 songs. Apple`s video iPod, launched this month, has a 2.5-inch screen and holds up to 150 hours of video clips.

``Competition is going to get more cut-throat and margins will fall further. Creative will probably slip in and out of the red going forward, `` said Kim Eng Securities analyst Dharmo Soejanto.

Soejanto, who rates Creative a ``sell,`` has forecast a net loss of $13 million for the December quarter.

Creative`s other rivals include South Korea`s Samsung Electronics Co. Ltd. <005930.KS>, which produces the Yepp players, Japan`s Sony Corp. <6758.T>, and South Korea`s Reigncom Ltd. <060570.KQ>, whose iRiver players have won good reviews.

Mobile handset makers Nokia Oyj and Motorola Inc. are also adding MP3 functions to high-end music phones.

A Reuters poll of eight analysts forecast an average net loss of $7.73 million on Oct. 26 for Creative`s fiscal first quarter.

This compares with a $4.8 million net profit in the same period a year ago (which included a $1.2 million loss from its investment portfolio), and a $31.9 million net loss for the June quarter, which also included a $9.3 million investment gain.

In August, Creative said it expected to almost break even in its first quarter and return to profit by end-2005, helped by two new MP3 players -- the Zen Micro Photo and the Zen Vision -- with photo and video capabilities.

Creative is seen reporting a mean net profit of $6.75 million for the fiscal second quarter ending Dec. 31, the poll showed. Two of the analysts forecast losses, and one breakeven.

STEADILY DECLINING MARGINS

Creative`s gross margins could rise to about 16 percent in its first quarter, from 10.1 percent in the fourth quarter when it was hit by a $20 million write-off of excess stock, but will likely fall to 14 percent in the second quarter, analysts said.

Its margins have fallen steadily from an average of 34-35 percent in the fiscal year ended June 2004. Apple`s iPod commands a margin of around 20 percent, analysts said.

Earlier this month, Apple reported a record quarterly profit that quadrupled, and sold 6.5 million iPods in the September quarter, more than triple the number sold a year ago.

According to industry estimates, Apple holds over 70 percent of the global MP3 market, versus about 11 percent for Creative.

Citigroup Smith Barney analyst Pratik Gupta said Creative would turn profitable only in its fiscal year ending June 2007, largely driven by lower marketing expenses. He expects a net loss of $10 million for the year ending June 2006.

The firm could swing from a net cash position of $60 million at the end of June 2005 to a net debt position of $40 million by June 2006, as its aggressive marketing expenses continue to eat into its cash, Gupta added.

Creative Chief Executive Sim Wong Hoo said he would spend $100 million on marketing worldwide this year and promised to ``out-market`` rivals, but analysts are sceptical that Creative has the resources to compete against the bigger players.

Some analysts said Creative`s new high-end computer sound card product, the Sound Blaster X-Fi, which enhances PC audio for music and gaming and has won overwhelming market acceptance, could prove the bright spot in an otherwise tough environment.

Digital entertainment devices, including MP3 players and musical computer keyboards, account for about 68 percent of Creative`s sales, while audio contributes 11 percent.

Creative is seen posting a consensus net profit of $8.9 million for the year ending June 2006, Reuters Estimates showed. This compares with $600,000 net profit in the previous fiscal year, which included an investment gain and a one-off charge.

Creative shares rose 12 percent in the July-September quarter, underperforming a 48 percent surge in Apple stock.