After loud lows, Gateway hopes to moove into black

Since March, when it acquired eMachines, a maker of low-price PCs, and named Wayne Inouye as its new CEO, Gateway has enacted sweeping changes designed to quickly return it to profitability after a long string of losses. It could get there as soon as the fourth quarter of this year, senior company executives said during a meeting with analysts Monday.

During the meeting, Gateway chief financial officer Rod Sherwood reaffirmed the company's third-quarter financial expectations for revenue of between $900 million and $950 million and a loss of 7 cents to 9 cents a share before charges--well below its 20-cent-a-share loss before charges in the same quarter a year ago.

Third-quarter restructuring charges of about $60 million will result in a loss of between 22 cents and 24 cents a share, based on generally accepted accounting principals, Sherwood said. But that leaves the majority of charges behind the company.

Since March, Inouye has been working to right the ship. Under his leadership, the company has laid off more than 4,000 employees, closed its chain of retail stores and has nearly completed outsourcing its product manufacturing, a measure that's expected to cut costs by 14 percent, the executives said. It has also reduced the number of components and component suppliers it uses for its products, in order to increase its manufacturing efficiency and help reduce costs.

"We look at everything--this is all about details," Inouye said.

Now Gateway is focusing on ways to increase sales, the key to driving profits and making the company's latest reorganization, its third in recent years, a success. To that end, the company wants to continue selling Gateway-brand PCs at retail, expand internationally and boost its corporate and direct-to-consumer businesses.

"Our direct business has atrophied over time. We have to build this back up," Inouye said.

One step will be to offer consumers the ability to order custom-configured Gateway PCs again via the company's Web site. Although Gateway got its start by selling custom-configured PCs, it moved to a system of set-configuration, set-price models last year.

Gateway's goals also include expanding sales in Japan and Europe, where eMachines-brand PCs have a presence but Gateway-brand PCs don't. Gateway will also work with so-called value-added resellers, companies that sell PCs to businesses, in an effort to reach new geographies or niche markets where it believes its sales of business PCs should be stronger.

Inouye is also working to improve customer support and satisfaction levels. He said Gateway will relocate tech support from outsourced locations, such as India, back to local markets.

The company is aiming to reduce tech support calls, as well, through improvements in product quality and design. It will also adapt eMachines' online tech support software and replacement parts program for Gateway-brand customers. The parts program walks customers through replacing their own parts--cutting down the need for PCs to be sent out for service. Inouye said the program has been shown to raise customer support satisfaction levels.

Improvements that lead to fewer calls could help Gateway save as much as $30 million to $40 million per year, he said.

Gateway has also introduced several redesigned PCs over the last few weeks. It has added several new Gateway-brand notebooks and desktops, including the Intel Pentium 4-based 700GR. And the company has brokered deals for retailers such as Best Buy or CompUSA to carry many of the new machines on their shelves.

Gateway plans to add even more PCs, including a new Media Center desktop, based on Microsoft's Windows XP Media Center Edition operating system, said Greg Memo, Gateway's senior vice president for platform development and operations. The Media Center desktop is scheduled to appear next month, Memo said.

Gateway's PCs also have a lot more in common now. In an effort to cut costs by using fewer components, the company has reduced the number of desktop PC chassis it uses from nine to six and cut notebook chassis from 11 to seven. It has also limited the number of component suppliers it uses, moving from six hard-drive suppliers to four and from seven optical drive makers to three, Memo said.

Although it has allowed some of its consumer electronics products to fade away without replacements, Gateway will continue to sell flat-screen TVs. It currently sells a variety of plasma screen and LCD televisions.

"This is an area that we know is important, and right now, we're looking at continuing our presence there...and at how we evolve this market," Memo said.

If all goes well during the fourth quarter, Gateway could, based on its internal targets, break even or post a profit for the quarter, assuming that revenues equal about $1 billion, gross margins equal 9.5 percent to 10 percent; selling, general and administrative costs equal 9 percent to 9.5 percent of revenue; and restructuring costs equal a little more than $5 million, Sherwood said.

While those figures are only projections, they would "leave us at breakeven to positive," he said. "We would like to be profitable for the fourth quarter. We are taking that very seriously."