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Ailing Emachines reports steeper losses

As expected, the budget PC maker reports major losses resulting from PCs languishing unsold in retailer inventories.

As expected, budget PC maker Emachines today reported major losses resulting from PCs languishing unsold in retailer inventories.

Emachines today reported a loss of 33 cents a share, or $47.4 million, on revenue of $124.5 million. That compares with a loss of 5 cents a share, or $2.9 million, on revenue of $213.9 million for the same period last year.

The company warned Wall Street earlier this month that revenue and earnings would be much lower than expected, and its quarterly results stayed within that revised range. Emachines blamed the sharp sales decline and expanding losses on an overall slowdown in the PC market, especially compared with last year's unusually high PC sales.

"Fundamentally, it appears that it was a sign of a slowdown in the retail market," Emachines CEO Stephen Dukker said in a conference call with analysts today.

Emachines shares closed up today, just below $3 per share.

Although Emachines is still a relatively small player in the PC industry overall, its troubles could be a warning sign for the industry as a whole. Stagnating inventories can spell doom for PC makers, analysts say, because they set off a cycle of price wars and falling profits.

Having made its name by elbowing its way into the top 10 PC makers on the popularity of its ultra-cheap PCs, Emachines has in recent months moved to expand its strategy to include revenue from its Internet services businesses. Later this year, it will release an Internet appliance based on Microsoft's MSN Web Companion design.

The lowest end of the market was hit the hardest by this year's uncertainty on Wall Street, Dukker asserted. "The lower-end consumer basically checked out of the market based on the uncertainties in the economy."

Emachines helped pave the way for the so-called free PC movement with its sub-$500 systems and was at the forefront of ISP rebates, which boosted sales at this time last year. But it appears that prices in the retail market have gotten too low even for Emachines' comfort, mainly a result of the slow sales that plagued this quarter's earnings.

Rebates also have been curtailed, curbing consumers' appetites for cheap PCs. Growth in the PC market in the second quarter was largely driven by overseas purchasing.

The company was forced to steeply discount its PCs as sales stagnated this quarter. Compaq Computer and Hewlett-Packard appeared to be in the same boat, Dukker said, noting that he has seen advertisements for sub-$100 Compaq systems with monitors, which added to the pricing pressure.

Compaq consumer PC sales were slightly below Merrill Lynch's expectations, according to analyst Gillian Munson.

"The consumer results were slightly below our expectations on a revenue basis and a good deal below our expectations on an operating profit basis," she said in a note to investors. "The issue in the quarter was competitive pricing in the U.S. channel as certain competitors tried to clear the channel of inventory."

Dukker assured analysts the inventory issues are now much improved, with channel inventory cut from seven weeks in early June to three and a half weeks at present. However, even that bright spot is tinged with bad news. "Quite frankly, it looks to me like the principal driver has been the reduction in price," Dukker said.

Almost every facet of the company's PC business is in bad shape: Emachines' unit shipments were down 29 percent this year, to 326,000 units. Average selling prices were down from $566 last year to $501 because of the discounting. Still, market share grew 2.6 percent from last quarter, according to researcher PC Data, and 9.1 percent from last year.

Revenue from Emachines' fledgling ISP business was down from $3.4 million in the first quarter of the year to $3.2 million. The company sells Internet service with its PCs, so it claimed a victory in the fact that the ISP sales decline did not exactly mirror the PC declines.

"Sales have definitely slowed down in the last eight to 12 weeks," PC Data analyst Stephen Baker said earlier in the month, when Emachines warned its sales would be lower than expected. "It is slow compared to last year; it's not just seasonal."