Narrower-than-predicted losses for cheap-PC firms

Emachines and PeoplePC report narrower-than-expected losses, but the former warns of a slowing fourth quarter.

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Emachines and PeoplePC, two pioneers of the cheap computer, reported narrower-than-expected losses Wednesday.

Excluding several items, Emachines said it lost $6.1 million, or 4 cents per share, on revenue of $175 million. The company lost $2.9 million, or 4 cents per share, in the same quarter last year. Analysts had been expecting a loss of 5 cents per share, according to First Call/Thomson Financial.

Meanwhile, PeoplePC said it lost $52.3 million, or 51 cents per share, excluding a charge for deferred compensation. PeoplePC said its gross revenue was $138.8 million, although the company has deferred $113.6 million of the long-term sales, reporting revenue for the quarter of $25.3 million. Analysts were expecting a loss of 56 cents, according to First Call.

Any good feeling, however, was quickly quashed as Emachines warned that it sees slowness in the overall PC market and cut its expectations for the fourth quarter.

"We are very, very concerned about the health of PC retail in Q4," Emachines chief executive Stephen Dukker said in a conference call with analysts. "We believe this is consistent with a general weakening in the retail economy."

Irvine, Calif.-based Emachines will reduce production in anticipation of an industrywide 20 percent year-over-year decrease in fourth-quarter retail PC sales.

Dukker said Emachines sees its own U.S. sales falling in line with the overall market slump, although the company's decline will be offset a bit by increased business from the United Kingdom. Even with the gains in Europe, Dukker said he expects sales to be below those in last year's fourth quarter.

Although Intel and some PC markers have offered caution about the fourth quarter, Emachines tone was by far the most dour, suggesting it is faring worse than most.

Dukker acknowledges that Emachines was hit harder than the rest of the industry with excess inventory this spring, but he said that the retail weakness in the fourth quarter will hit all of the major players.

"The joy is spread equally now," he said in an interview.

However, Dukker did say he believes Emachines can increase sales in 2001 by 10 percent. Early next year, Emachines will look to begin selling directly to consumers while maintaining its retail presence, he added.

It remains to be seen whether Emachines has enough money for the large budget needed to support direct sales and whether its retailers will put up with selling direct.

Dukker brushed off suggestions that Emachines does not have the resources to support a direct business, noting the company has a strong balance sheet.

"We have the resources to do that," Dukker said. "We intend to be very smart in the way we use our cash. We're not going to have a spending spree."

Dukker would not say whether he has told retailers of his plans or what their reaction was if he did, but he said the direct business is not intended to hurt retailers.

"The fact is the time comes in every company's life where you need to find a way to stimulate sales," Dukker said, adding that Emachines plans to take a page from PeoplePC's playbook by offering PCs for a monthly fee.

While Emachines warned of a slowdown that could hit other consumer PC companies, PeoplePC chief executive Nick Grouf was upbeat.

"Our channel is obviously very different than these companies," Grouf said. "We are continuing to see healthy demand going into the fourth quarter."

San Francisco-based PeoplePC sells to business that give their employees PCs, as well as to individuals that pay one monthly fee for a computer and Internet access.

PeoplePC said the proceeds of its mid-August initial public offering, combined with a line of credit, should fund the company's operations through next year.

Grouf said the company should be able to increase its fourth-quarter sales by 60 percent to 65 percent from the third quarter's $25.3 million. Membership should grow by a similar percentage over the current base of 300,000 subscribers.

PeoplePC, which this quarter started selling laptops and more expensive PCs along with its basic $24.95 per month system, is also looking to start offering high-speed digital subscriber line (DSL) service. However, Grouf would not say whether the company has already lined up partners for the service, when it will launch or how much it will cost.