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Emachines warns of loss, plans cheaper PC strategy

Budget computer specialist Emachines says it will post a much wider than expected loss as it slashes prices on its substantial inventory of already assembled computers.

Amid what it sees as a glut of cheap PCs in the market, budget computer specialist Emachines today said it would post a much wider than expected loss as it slashes prices on its substantial inventory of already assembled computers.

Irvine, Calif.-based Emachines said it expects revenue for the quarter ending July 1 to be in the range of $115 million to $125 million and projected a per share loss, before acquisition-related and other charges, to be between 30 cents and 33 cents per share. Analysts had been looking for a loss of 1 cent per share, according to those surveyed by First Call.

The move sent the already languishing stock plummeting. Shares closed today at $2.59, down $1.09 or almost 30 percent. Emachines went public in March at $9 per share.

"As we have previously noted, consumer demand for personal computers in the second quarter has been significantly below market expectations," Emachines chief executive Stephen A. Dukker said in a statement. "Several of our top retail accounts recently have announced that their sales of personal computers, as well as other technology and big-ticket items, are down."

Dukker said in a conference call with analysts that Emachines has about five to six weeks of inventory based on its current rate of sales, with as much or more inventory in the sales channel from rivals such as Compaq Computer and Hewlett-Packard. While that's bad news for the PC makers, it could be good news for consumers.

Predicting a "ferociously competitive July," Dukker said he expects Compaq and HP machines to be selling at $399, a price that has been approached in the past but which has remained largely the frontier of Emachines and others focused on the lowest end of the PC market.

Compaq spokesman Alan Hodel declined to comment on current or future pricing, citing the so-called quiet period prior to the company's earnings release. An HP representative was not immediately available for comment.

Dukker said some of the company's larger-than-expected loss comes from slower unit sales, but said most of the red ink will come as Emachines slashes prices.

"It's overwhelmingly resulting from writing down the substantial amount of overbuilt second-quarter product and bringing it down to levels where it can be cleared out in time for arrival of (third-quarter products)," Dukker said.

Emachines
at a glance

HQ: Irvine, California  
President/CEO: Steven A. Dukker  
Employees: 162  
Annual sales: $814.32 million  
Annual income: -$5.73 million  
Date of IPO: March 2000  
Ticker: EEEE  
Exchange: Nasdaq

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Source: Bloomberg 6/19/00

U.S. Bancorp Piper Jaffray analyst Ashok Kumar said the current problems could spell impending doom for Emachines.

"The odds are greater that they'll implode or go out of business," Kumar said. "They do not have a strategy that's sustainable."

Dukker acknowledged there are more tough times ahead, saying Emachines' third-quarter sales could be 15 percent below Wall Street expectations with profit margins as much as 30 percent lower as the company focuses more on the lowest end of the PC market. Dukker said its profit margins in the all-important fourth quarter could also be hit by the move to cheaper machines.

Kumar said while second-quarter demand has been seasonally slow, it has been strongest in Asia, where Emachines does not sell computers, and at the higher end of the consumer market, an area in which Kumar said Emachines is not well suited to compete.

"Essentially you're trying to take a Yugo brand and position it against a Honda," he said. "That's not feasible."

Emachines plans to report second-quarter earnings July 26.

Dukker did announce a few strategic efforts aimed at improving Emachines' long-term business, saying both the announcement of sales in Europe and the release of the company's first Internet appliance were imminent. He also said the company's heavy discounts will allow it to get into a couple of major new retail accounts.

"This is a difficult time for us, but there are some silver linings in these clouds," Dukker said.