Gateway shares plunge as revenue drops

The PC maker's shares take a hit after it reports a loss as it revenue drops 32 percent from the same quarter last year. Layoffs are possible.

Richard Shim Staff Writer, CNET News.com
Richard Shim
writes about gadgets big and small.
Richard Shim
3 min read
Gateway shares dropped by nearly 25 percent Friday, after the PC maker on Thursday reported shrinking revenue and earnings that fell short of expectations.

Also on Thursday, a company executive said more layoffs are possible as Gateway continues to restructure.

Gateway shares were down $3.60, or 24.67 percent, to $10.99 on Friday.

Including special charges, Gateway lost $20.8 million, or 6 cents per share, on revenue of $1.5 billion, the company reported Thursday. In the same quarter last year, the San Diego company earned $118 million, or 37 cents per share, on revenue of $2.2 billion.

Excluding special charges, the company had a loss of $9 million, or 2 cents a share.

A consensus of analysts expected a loss of 1 cent per share on revenue of $1.9 billion, according to First Call.

"All in all, we've held our own...We've lost a little ground internationally, but we've made up for it with growth in our portables, as well as the education and small-business markets," CEO Ted Waitt said in a conference call with financial analysts.

Gateway Chief Financial Officer Joseph Burke said that job cuts are possible.

"Layoffs are a natural byproduct of any restructuring," he said in an interview.

In regular trading, Gateway shares closed down 88 cents, or 6 percent, at $14.59. In after-hours trading, shares dropped to $13.25, according to Island ECN.

Lean times in the PC market have created an ultra-competitive market with major players, such as Dell Computer, Compaq Computer and Gateway, entering into a price war.

All the combatants have vowed to maintain and, in some cases, increase market share at all costs, which has often taken the form of streamlining operations through layoffs. Even with layoffs, many of the major players have been forced to lower estimates and give sobering guidance for the rest of the year.

In January, Gateway underwent a management shakeup in which former CEO Jefferey Weitzen stepped down and Waitt, Gateway's founder, took the reins once again. The company also announced that month that it would cut 3,000 of its 24,000 jobs worldwide.

Then in February, Gateway warned that operating results in the first quarter would be far lower than analysts expected. The company reported a loss of a penny a share in the first quarter. At the time, Gateway also said it expected to return to profitability in the second half.

The company on Thursday amended its guidance for the second half from returning to profitably to approximately breaking even.

The company also announced Thursday that it is speeding up its efforts to transform from being a traditional PC manufacturer to a "provider of technology solutions." This could lead to significant restructuring of its worldwide operations and administrative functions, the company said.

Gateway sold 923,000 PCs worldwide in the second quarter, which is a decline of 21 percent compared with the same quarter last year. But sales grew 27 percent in the small to medium-sized business category and 11 percent in the education sector, compared with the second quarter last year.

The average selling prices for Gateway products dropped from $1,723 in the first quarter to $1,501 for the second quarter. The decline was partly due to the Gateway Guarantee, which began in late May and promises that the company will beat the advertised price of competitors Compaq, Dell, Hewlett-Packard, IBM, Sony or Toshiba. The program increased the likelihood of a purchase after a consumer makes an initial phone call to Gateway, the company said, but it did not boost the number of sales overall.

Waitt called the program "successful," but Burke added that the company will phase it out by the end of July.

To increase revenue, the company is accelerating its plans to consolidate the U.S. consumer and business units into a U.S. Markets group. Gateway is also creating a Solutions group, which will handle overall hardware, software and services. The costs of restructuring these groups will be in the $15 million to $20 million range, which Burke said would partly be used for severance packages of employees let go as a result of restructuring.

The company said it has about $1 billion in cash and marketable securities.

Earlier in the day, Michael Dell, chief executive of rival Dell Computer, put some pressure on Gateway to post good results when he said his company anticipates it will be within earnings-per-share and revenue guidance for its fiscal second quarter. The Round Rock, Texas-based company will report its second-quarter results Aug. 16.