Aside from Gateway Inc.'s (NYSE: GTW) second quarter results investors have another thing to be enthused about. The company is ahead of the curve as PCs and Internet services converge.
Most box makers know their products are becoming mere commodities. Pricing pressure from the the sub-$1,000 PC reality and now the "free PC" push all threaten conventional PC makers such as Compaq Computer Corp. (NYSE: CPQ). Gateway seems to be among the best prepared for the day when PCs are the equivalent of the cellular phone.
| Gateway: Ahead of the curve? |
Gateway beat estimates by a penny with second quarter earnings of 56 cents a share on record sales of $1.9 billion. But more importantly -- if you're looking ahead -- Gateway's non-PC sales represent 10 percent of the company's revenue. The 10 percent mark indicates Gateway is well ahead of schedule when it comes to diversifying its revenue stream.
For the record, Gateway still depends on PC sales. It benefited from an uptick in Asia and so-so results in Europe. U.S. demand remained strong as Gateway remains the consumer brand of choice. Gateway managed to improve margins to 22 percent and hold average selling prices about flat with first quarter levels of about $1,900.
With a beefed up management team, Gateway has delivered results on PCs while showing it develop alternate revenue streams.
The company's reported negotiations with Earthlink (Nasdaq: ELNK) are just the latest example of how Gateway is thinking outside of the PC box. Gateway on Thursday said it wasn't in talks currently with an Internet service provider. That's good news for a lot of worried analysts.
Gateway may not need Earthlink anyway. The company reported its Gateway.net subscribers doubled to over 400,000 since the Gateway bundled its Internet service with most of its PCs.
Other recent moves by Gateway, which were panned originally, are beginning to pay off and even be copied by the competition.
Gateway is extending its pay-as-you-go Yourware program into the business market. Gateway showed a 30 percent pop in its units for business users and revenue came in at $878 million, up 12 percent from a year ago.
And the Gateway Country Stores have also provided a valuable vehicle to bring in small business sales. Originally scoffed at, Gateway has shown a little bricks-and-mortar is a nice extension to its direct model because it attracts small business owners.
The company is also branching out via deals with online e-tailer NECX to offer software and other accessories. Through a $21 million investment in privately held NECX, Gateway is offering software and other accessories through www.spotshop.com. The new sales won't appear in the results until the third quarter.
Gateway was out in front offering Net service in 1997, but it's not alone anymore. Dell Computer Corp. (Nasdaq: DELL) will offer Net access and Micron Electronics (Nasdaq: MUEI), Hewlett-Packard (NYSE: HWP) and Compaq all have ISP deals. There's also free PCs and America Online Inc.'s (NYSE: AOL) entry into the PC world.
"With incremental share gains becoming more difficult and the commoditization of hardware, consumer centric vendors such as Gateway will have to maneuver carefully around the minefields ahead," said Piper Jaffray analyst Ashok Kumar.
But Gateway is still ahead of the curve. Gateway realizes the value of a brand -- it is more of a marketing company than a PC maker. Grab customers and keep them is the Gateway's future.
Hmmm. Compaq is pressured to name a new CEO after a search drags on a little too long. A few prized candidates turned the job down. Meanwhile, Hewlett-Packard (NYSE: HWP) hired the highly-regarded Carly Fiorina away from Lucent to be CEO.
Enter Michael Capellas, Compaq's chief operating officer, as new CEO.
The good news is Compaq disbanded the three-headed monster known as the Office of Chief Executive, a three-person committee that ran the company during the search.
The bad news is Capellas is an insider since he has been with the company since August 1998.
Was Capellas the best choice or a desperation move? We say give the guy a chance, but the clock is ticking.
Ben Rosen, chairman of Compaq, said Capellas doesn't need a learning curve. That's a good thing. Compaq doesn't have a lot of time to turn things around. Capellas can talk about the plan to turn Compaq around, but at this point the company needs to show it can execute. Talking turnaround is one thing. Actually doing it is quite another.
Capellas has to give investors a new vision and execute quickly. There will be no honeymoon for an insider.
Good luck Mr. Capellas. You may need it.