2HRS2GO: Gateway charts own path
SAN FRANCISCO -- You don't often hear a PC company admit it's not good at manufacturing.
Not that Gateway (NYSE: GTW) says so directly, but nowadays the purveyor of cow-themed boxes comes as close as you can to admitting it.
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Perhaps that's why Gateway seems a bit more interesting than its bigger rivals these days. All the big PC makers are trying to redefine themselves as something more than just box companies, but most of them are targeting the large organization, high-end space as the place for adding other services and products beyond the PC.
Notwithstanding the Sun Microsystems (Nasdaq: SUNW) alliance announced this week, Fortune 500 firms don't head Gateway's list of growth drivers. "Enterprises don't want personalization, they want 400 widgets," CFO John Todd said yesterday. "But manufacturing isn't one of our core strengths. Personalization is, we can personalize and customize for the lowest denominator."
That was a tired-and-rumpled-looking-but-still-enthusiastic Todd speaking late Tuesday afternoon as he sat in the lobby of the Palace Hotel, site of the Robertson Stephens Tech 2000 conference. Repeating the Beyond the Box spiel was probably getting old for Todd at that point, after a day of interviews and presentations with analysts, journalists and fund managers.
But it gets a lot of attention because it's a different approach. While Dell (Nasdaq: DELL) and Compaq (NYSE: CPQ) push servers, storage arrays and corporate services, Gateway focuses on its traditional strengths in the consumer, small business and education markets. Wall Street likes the idea: GTW shares shot up nearly 28 percent last week after the company outlined its plans at an analyst meeting.
At the time, Gateway said its "Beyond the Box" plan would lead to $30 billion in revenue by 2004. Yesterday Todd softened that stance.
"I wouldn't focus on the $30 billion," he said. "I would focus on the fact that we said we're going to accelerate revenue."
In other words: Don't Hold Us To the Number.
Gateway wants Wall Street to accept new metrics. Average unit prices? Todd wants you to forget 'em. "Why would you want to measure AUPs? You should measure profit per box," he said.
He has a good point. Although Gateway's average unit price has dropped more than $1,000 over the last three years, earnings have grown well over the same period. Gateway's gross margin rose 4 points in 1999 while most rivals' saw margins suffer.
As long as the operational bottom line keeps rising, it doesn't really matter if boxes are getting cheaper. Gateway finds ways not only to spin new revenue out of a PC, but then boost margins within those new streams.
Start an ISP? Great -- now dish it off to AOL and let the ISP specialist worry about the technical details. We're doing leases? Ok -- now let's extend financing. Sell an extended warranty. Follow up with a phone call a couple of months down the road and see if you can sell a few more peripherals.
Other than the Gateway.net ISP, the company's Beyond the Box initiatives don't seem like much by themselves, but if you add it together, it adds quite a bit to a PC's ultimate value. And all provide higher margins than hardware, as Todd never tires of pointing out.
"At the end of the day, we're going to provide a richer mix of revenue and higher margin," Todd says. "Think about how many companies grow their revenues 100 percent and are margin accretive."
Not many pull off the trick, which is why I expressed my own doubts last week about Gateway's ability to keep boosting margins through ancillary businesses. Still, there's no denying the company's plan is working so far.
The company got 20 percent of its overall revenue from Beyond the Box businesses, and expects that figure to reach 40 percent by the end of this year. Recurring revenue, such as financing and Internet access, should rise to 25 percent of Gateway's total top line, up from 10 percent last year. In the long run, Todd sees no reason Gateway shouldn't derive as much as half of its dollars from recurring revenue.
Analyst consensus for Gateway currently predicts 2000 EPS of $1.83, or 35 percent growth. That's not much better than Dell, from whom analysts expect a 32 percent improvement on the bottom line.
But Dell's growth rate is coming down from past levels, while Gateway's acclerates. The market reflects that: though Gateway sits well below its 52-week high, the GTW price remains almost double its level a year ago; including gains so far today, DELL rose just 6 or 7 percent over the same period. You could see the interest reflected in the Robby Stephens crowd also -- Gateway drew one of the bigger audiences of the day.
No wonder Todd seems enthusiastic these days.
Other issues:
Yet since Agilent's IPO in November, NATI shares have far underperformed A and TEK, and at least one index of Scientific and Technical instrument makers.
Perhaps investors are looking at the future. First Call consensus predicts 18.5 percent EPS growth for National Instruments in the current year, versus 144 percent for Tektronix and 25 percent for Agilent. Granted, that's not a direct comparison, since Agilent and Tektronix have other businesses that don't compete with National Instruments; but it's as close as you can get. 22GO>