Gateway reports loss as expected

The PC maker posts a loss that matches analysts' expectations and says its loss in the current quarter should narrow thanks to a decline in expenses.

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Gateway on Thursday reported a first-quarter loss that matched analysts' expectations and said its loss should narrow in the current quarter as the company continues to cut prices in an effort to regain market share.

Including $99 million in pretax charges, Gateway said it lost $123 million, or 39 cents per share, on revenue of $992 million. That compares with a loss of $502.9 million, or $1.56 a share, on sales of $2 billion in the first quarter of 2001.

Excluding the charges, Gateway lost $61 million, or 20 cents per share.

Analysts had been expecting Gateway to report a loss of 20 cents per share, according to the consensus estimate from First Call. Revenue estimates from several analysts were in the range of $975 million to $995 million, according to several research notes.

Gateway said it expects revenue to be roughly similar in the current quarter instead of declining, as it has in past second quarters. The company said it expects a further decline in expenses, which should result in a narrower loss than it had for the first quarter.

The second-largest direct PC seller, Gateway has been embarking on a strategy of cutting prices in hopes of gaining market share.

In an interview, Gateway Chief Financial Officer Joseph Burke said that Gateway's strategy of cutting prices is improving the company's market share, though he could not say how much.

"The aggressive pricing strategy we adopted in January is really moving the needle," Burke said. "We feel confident--not cocky--that we are getting the results that we desired."

Analysts, however, have questioned how well the market share plan is working.

"Dell's apparent unwillingness to lose the market share it has established (matching price cuts thus far) will make significant unit growth by Gateway very challenging," Vadim Zlotnikov, an analyst at Wall Street firm Sanford C. Bernstein, wrote in a research note Wednesday.

Gateway said that it gained market share in the consumer and small- to midsize-business segments, but preliminary figures from IDC show that overall, Gateway's share was roughly flat with the fourth quarter of last year and down substantially from a year ago.

According to research firm IDC, Gateway had 6.1 percent of the U.S. PC market in the first quarter, compared with 6 percent in the fourth quarter and 8.7 percent market share in the first quarter of last year.

Preliminary figures from market researcher Gartner Dataquest show that Gateway actually lost share in the first quarter. Gateway had 5.8 percent of the U.S. PC market in the first quarter, Gartner said, down from 6.2 percent in the fourth quarter of last year.

"The second quarter will be very telling," said Charles Smulders, an analyst with Gartner. "By then, it will be possible to see whether the company's aggressive price cuts and ad campaigns are taking root with the public. To survive, volume will have to grow in 2002. They need to sell about a million units to be profitable."

Gateway CEO Ted Waitt said on a conference call that he was not concerned that Dell appears to have matched and in some cases surpassed Gateway's price cuts.

Although Dell may be lower on some days, Waitt said, "On any given day we might have a better deal than they do."

Waitt said that about 5 percent of PC sales in the past quarter were of machines that the PC maker carried in its stores. During the quarter, Gateway was in the process of expanding the number of stores that carried inventory, and Waitt said that by March, roughly 10 percent of PC sales were of PCs that were stocked in-store.

Although Waitt said that the company sees opportunities in products for the digital home, it has not committed to building machines that are part of Microsoft's Mira Web tablet or Freestyle entertainment PC projects.

Burke said that the company's forecast of flat sales, versus the historical 7 percent decline from the first to the second quarter, is based on continued share gains, not on an improvement in the overall PC market.

Gateway said it sold 645,000 PCs in the first quarter, a 30 percent drop from the number it sold in the U.S. last year, but only a 5 percent drop from the fourth quarter, which is typically the strongest quarter in the PC business.