Gateway slashes earnings forecast

The PC maker said it will post break-even earnings for the current quarter, cutting estimates for the second quarter in a row.

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Gateway warned Wednesday that it will post only break-even operating results in the first quarter--far short of analyst expectations--as it looks to cut prices and boost its customer satisfaction ratings.

A consensus of analysts had expected the PC maker to earn 17 cents per share, according to First Call. Gateway now expects to break even, excluding a substantial one-time charge to cover job cuts and restructuring.

Gateway also said it sees its unit sales in the first quarter down slightly from year-ago levels, which the company said is in line with previous estimates.

The San Diego-based company also estimates that a one-time charge to first-quarter earnings will be between $150 million and $275 million, including a previously announced estimate of $50 million for job eliminations and related matters. The increase was attributed to the shift in its business model announced earlier Wednesday. The company will dramatically shrink its product line to cut costs.

Speaking at the company's financial analyst meeting in San Diego, Chief Financial Officer Joe Burke outlined a number of cost-cutting moves, including the possibility of closing poorly performing Gateway Country stores, limiting its international markets, and virtually halting the opening of new stores.

"We realize that we can't be all things to all people today," Burke said. "So we're not going to try to do that."

And while the company will continue to seek additional profits from selling products other than PCs, Burke said the company is now focused on making its core PC business profitable.

"We will focus on 'box' profitability," Burke said, referring to PCs. "We will not be distracted by beyond-the-box opportunities."

CEO Ted Waitt said the company plans to return to profitability in the second half of the year, with unit sales slightly above those of a year ago. Over time, the company will look to re-establish a business model in which the company can make $5 in net profit for every $100 in sales.

"It's not rocket science," Waitt said. "It's basically block and tackle execution."

This is the second consecutive quarterly warning for Gateway, which said in late November that fourth-quarter sales would fall 25 cents short of expectations. In January, Gateway reported earnings that were below its lowered fourth-quarter earnings. At the time, the company also cut its 2001 outlook.

On Wednesday, Gateway also restated its year 2000 results to reflect an additional $75 million in write-downs for Gateway's minority investments in technology and other companies. The earnings were also restated to reflect adjustments to the company's reserves for loan losses as well as several accounting changes that took place last year.

David Bailey, an analyst at Gerard Klauer Mattison, said that the revision to earnings was not a surprise. "Having guidance revised downward has become more typical than anyone would like," Bailey said. But he added that the restating of last year's results makes Gateway's financial picture look more bleak than expected.

As for the shift to fewer product configurations and a lower reliance on retail stores and beyond-the-box sales, Bailey said the moves did not represent a major shift, but are instead a pragmatic response to the poor market conditions.

"It's kind of a retrenching," Bailey said, echoing the words that Federal Reserve Board Chairman Alan Greenspan used Wednesday to characterize the overall U.S. economy.

Merrill Lynch analyst Steve Fortuna cut his rating on Gateway shares Tuesday, warning that the company might lower its financial outlook at the analyst meeting.

In regular trading, Gateway closed up 48 cents, or 3 percent, to $17.20. Shares of Gateway fell to $15.63 in after-hours trading, according to Island ECN.