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Gateway shares crash on earnings warning

The PC maker's shares fall more than 30 percent after the company warns of lower-than-expected earnings growth on sluggish PC sales.

Shares in PC maker Gateway dropped 40 percent Thursday after the company warned of lower-than-expected earnings growth on sluggish PC sales.

Meta Group says a combination of factors, including a general economic slowdown, market saturation and a shift in consumer buying habits, are contributing to a slowdown in the consumer PC marketplace.

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Weak computer sales over the holiday weekend prompted Gateway on Wednesday to lower its earnings and revenue forecast for the current quarter.

Gateway shares dropped $11.73 to $17.77 in late morning trading Thursday. The company issued the revenue warning after the markets closed Wednesday.

The San Diego, Calif.-based PC maker said it expects to report operating income of 37 cents a share for the fourth quarter--25 cents below previous analyst expectations--because of "considerably weaker-than-expected consumer holiday sales of personal computers," according to the company.

In a conference call Wednesday, Gateway chief financial officer John Todd said the company had been comfortable with earlier estimates until the Thanksgiving weekend, when the usual sales failed to materialize.

"Historically, we see a significant spike over this Thanksgiving weekend," he said. "PC sales were down 30 percent over Thanksgiving week...For the first time we are seeing the impact of economic slowing."

Revenue is expected to come in at $2.55 billion, roughly equal with the fourth quarter of 1999 but $500 million below expectations.

The warning, anticipated by some analysts, comes amid a massive freeze in the consumer PC market. Various tracking firms have reported that consumer spending has been slow this quarter. Overall, PC sales are down for the year.

Gateway's "data is pretty dramatic," Robertson Stephens analyst Eric Rothdeutsch said. "It is definitely at the low end of everybody's expectation. This is turning out to be a nightmare quarter for all PC demand in general."

Gateway also said it will take a one-time charge of approximately $200 million, or 39 cents a share, related to losses associated with investments in technology-based companies. Including the charge, Gateway could report a loss of 2 cents for the fourth quarter, the company said.

Gateway expects matters to worsen in 2001. The company lowered its earnings-per-share estimate for 2001 to $1.89, down from $2.28.

"This is a significant shortfall for Gateway," Rothdeutsch said. "They're guiding to only 10 percent growth next year is pretty pessimistic about their future."

Excess inventory will likely spark price wars in the first quarter, while the economic slowdown will affect the entire year, company executives said. However, executives cautioned that their predictions lean toward the conservative side and that the outlook could improve. The new forecast, executives acknowledged, is based only on sales over the four-day weekend.

For the quarter, Todd said, PC revenue will likely be down 9 percent compared with the same period last year--and down 8 percent in the first quarter. "Q1 will be an aggressive price war" because of growing inventories, he said.

Jeff Weitzen, Gateway CEO, added that the company is not suffering from any execution or operational issues. "It is purely a question of consumer demand," he said.

For next year, both Weitzen and Todd said that Gateway will make a concerted effort to promote Internet appliances and consumer electronics, as well as "beyond-the-box" products such as Internet access to owners of other brands of PCs.

At the Comdex trade show earlier this month in Las Vegas, company representatives discussed a number of devices, such as wireless Web-surfing tablets and home phone systems, that will likely hit the market toward the middle of next year.

But it is the earnings warning that has investors' attention at the moment. "It's nothing short of a debacle," said Roger Kay, an analyst with market researcher IDC.'s Joe Wilcox contributed to this report.