Gateway hits its lowered target

The Poway, Calif., PC maker posted a first-quarter loss of $200 million, or 62 cents per share. Revenue for the quarter, which ended on March 31, totaled $844 million.

That compares with a loss of $126 million, or 39 cents per share, on revenue of $992 million in the same period a year ago. Gateway's first-quarter loss included a $78 million restructuring charge.

Analysts expected Gateway to lose 40 cents a share on revenue of $838 million, according to a survey by earnings tracking firm First Call. This estimate did not take into account any of the charges Gateway took during the quarter.

Excluding the charges, Gateway lost 38 cents per share for the quarter, Gateway Chief Financial Officer Rod Sherwood told CNET News.com. The company warned in March that it would take a charge of $75 million to $80 million for restructuring during the quarter resulting in a loss of 62 cents to 66 cents per share.

"Our performance in the first quarter was affected by the weak economic environment as well as our shift to higher-value products and services," Gateway CEO Ted Waitt said in a statement. "We're going through a major transformation of our business, but we are already seeing results--stronger sales of mid- to high-end PCs; growth of higher-margin, non-PC products; and lower costs."

During the quarter, Gateway launched a reorganization plan designed to lower its costs and reduce its expenses, in an effort to put the company on the road to profitability.

The plan, aimed to help streamline the company's operations, included cutting 1,900 jobs and closing 76 Gateway stores--adding up to a total of 80 store closings since the beginning of the year.

Strategy shift
Gateway also launched a new plan to bolster revenue by increasing unit sales of PCs and consumer electronics. That plan included changing from a strategy of using low prices, to offering PC bundles that include highly requested components such as monitors and CD burners, and that have the cost of shipping built into the price of the PC. The flat-fee approach does away with rebates and free component offers, and aims to entice buyers looking for quick and easy transactions.

As a result of the shift in focus away from low-price PCs, Gateway's PC unit sales fell for the quarter, the company said in a statement. Unit sales were 506,000, a decrease of 22 percent year over year or 30 percent sequentially, the company said.

Gateway had fewer unit shipments than had Apple Computer, which sold 711,000 units during the first quarter. But Sherwood said Gateway's new strategy worked in that it boosted the company's average selling price to $1,670 in the first quarter, up from $1,467 in the fourth quarter.

"It did well in the mid- to high-end market where we have a lot of value for the money in the (new) configurations," he said.

Meanwhile, Gateway plans to launch a new line of low-price PCs in the third quarter. These new models should help the company boost its unit shipments, Sherwood said.

Gateway is also putting heavy emphasis on plans to create a consumer electronics line made up of products, such as digital televisions, that will work together and share data with PCs. The company will sell these products along with its PCs, and will offer services for installing the gadgets and connecting them for customers, Waitt said.

"We're still going to sell PCs," he said. But "the PC is going to become one key product in an ever-expanding array of products."

Analysts said that though Gateway is going down the right path, it may have a difficult time increasing unit volumes while also seeking to boost profits.

"I believe Gateway's biggest challenge will continue to be streamlining its operations and logistics. It's the only way Gateway will be able to profitably sell its existing line of products," said Brooks Gray, an analyst with Technology Business Research.

"Gateway has good, reliable products and good brand-name recognition," he said. "But with the lack of differentiation in the market, Gateway management must continue to focus on cutting back on underutilized (manufacturing) capacity and streamlining distribution and logistics. This will put the company on a path to profitability and give it a better understanding of its customers' requirements."

Looking at the second quarter, Sherwood said Gateway is comfortable with financial analysts' current estimates. First Call forecasts a loss of 27 cents per share on revenue of $798 million in the second quarter.

Meanwhile, Gateway is under investigation by the Securities and Exchange Commission (SEC) for its accounting practices. As a result of the investigation, which began in 2000, Gateway has restated financial results for 1999, 2000 and 2001.

Gateway delayed the release of its 2002 annual report to April 15 so that it could revise how it accounted for fees received by AOL Time Warner for bundling America Online software.

This affected net sales and the cost of goods sold for 2000 and the first quarter of 2001. Gateway switched from reporting those fees on a gross basis to reporting them on a net sales basis. The changes did not affect previously stated financials such as Gateway's net income or net loss, the company said.

Gateway believes that it will be able to resolve matters with the SEC without an adverse material impact on its finances, such as operating results or cash flow, the company said in its 2002 annual report.