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Gateway hints at profitability plans

At an analyst event, Gateway's CFO says the company is heading back to profitability, despite weak first-quarter PC demand resulting from economic woes and war jitters.

Gateway says it's on the way back to profitability, despite weak first-quarter PC demand resulting from economic uncertainty and war jitters.

Demand for PCs has been relatively weak so far in 2003, with only about three weeks left in the first quarter, the company said.

"Demand in general remains soft. The macro picture is cloudy with the (possible Iraqi) war and overall economy," Rod Sherwood, Gateway's CFO, said on Wednesday while speaking at a conference organized by Morgan Stanley.

Later Sherwood added, that it's "relatively weak out there. I'd think it's a little bit weaker than normal, (in terms of) seasonality."

The current situation doesn't bode well for Gateway or any of its competitors or suppliers, but the company believes its latest reorganization plan will help it return to profitability by the fourth quarter, Sherwood said.

That plan, which is still being reformulated in some areas by new department heads hired over the past few months, boils down to two basic priorities for 2002, Sherwood said: growing the PC business, while lowering general and administrative expenses--the bulk of which comprised salaries and company operations such as human resources--and cutting costs for things like components and product warranties.

Citing a scenario in which Gateway lowers its selling, general and administrative expenses to less than $200 million--a target it expects to hit during the second quarter--and increases revenue, while cutting $300 million or more in costs, Sherwood said "Clearly that will get us a long way toward the objective of fourth-quarter profitability."

So far, Sherwood said that due to some of the measures Gateway has already put in place, selling, general and administrative expenses for the first quarter would be consistent with the company's fourth-quarter 2002 levels, which were $249 million. The company originally expected expenses to increase sequentially.

Sherwood said Gateway's plan would likely involve closing more Gateway retail stores and working to "right size" the staff of some operations, but he otherwise declined to elaborate on layoffs or other potential methods of reducing expenses. The company, which closed four stores earlier this year, will provide more information on its plans at a later date, he said.

New products
While it looks to trim operations, Gateway will seek to drive profitability by bolstering its PC business with new products and programs that improve its relationship with its customers.

Gateway plans to refresh its business product line by bringing out new servers, storage devices and network appliances. These new products, including servers that offer Microsoft and Linux operating systems, will start coming out in the April time frame, Sherwood said.

Gateway is also looking at a number of potential product categories, including a convertible tablet PC and a line of handhelds. It also intends to launch new notebooks based on Intel's Centrino family of chips, Sherwood said.

A new all-in-one Profile 5 desktop, along with an "ultrasmall" desktop will come later in the year, Sherwood said.

The company also plans to add new "digital solutions," which are Gateway-branded consumer-electronics products along the lines of the company's 42-inch plasma display launched before the holidays, Sherwood said.

The slides Sherwood presented at the meeting included examples such as Gateway-branded audio equipment, new digital TVs and PC accessories.

A company representative said that plans to deliver those products had not yet been finalized, however.

Changes in store
Gateway also wants to improve customer relationships by tapping extra sales representatives for business and by improving the way it handles sales service and support for consumers direct and via its Gateway stores.

To start with, Gateway has done away with rebates and extra shipping charges on its PCs as part of a new strategy that seeks to simplify the PC buying process, granting customers a single, low price to contend with, a company representative said.

One of the company's largest changes may be in how Gateway uses its Gateway stores, however.

The chain of retail outlets, which is being reinvented by former Banana Republic executive William Parker, can benefit Gateway by becoming a center for not only buying desktops or servers but also for picking up digital TVs and services, as well as other, as-yet-unnamed offerings, Sherwood said.

But Gateway will also look to the store chain for savings--by eliminating or moving some locations that are not meeting expectations. That process could cost Gateway as much as $80 million, Sherwood said.

Ultimately, Gateway would like to make the stores operate more like retail stores than product showrooms, he said.

At this point, the stores' main function is to allow customers to order Gateway PCs. But the company wants to transform them to sell not only its PCs and plasma television, but deliver a whole line of consumer electronics as well as services to weave them together.