Gateway CFO departs as shake-up continues

Joe Burke, who had been responsible for Gateway's global expansion, will replace John Todd as chief financial officer. Bart Brown, the person most recently responsible for Gateway's beyond-the-box strategy, replaces Cliff Holtz as senior vice president of the company's consumer operation. Dave Russell becomes the senior vice president for supply chain management.

Company founder Ted Waitt unexpectedly replaced Jeffrey Weitzen as chief executive on Monday. Just a year ago, Weitzen had assumed the helm from Waitt, who stayed on as chairman.

But a near collapse of consumer PC sales buffeted Gateway during the fourth quarter, for which the company missed expectations that had already been lowered. The company subsequently announced cost-cutting measures, which included the elimination of 3,000 jobs.

Wall Street's response to the changes was mixed. In early trading Tuesday, the San Diego-based company's shares started up about 4 percent, but at midmorning they were down 49 cents, or about 2 percent, to $21.17.

Waitt was fairly direct explaining Weitzen's departure in a conference call Tuesday as he outlined a broad strategy for turning around the company that he founded.

Why?
"The first question people probably ask is, 'Why did this happen?,'" he said. "Things are what they are. Jeff decided to retire. And I love Gateway."

Sue Parks remains as senior vice president overseeing Gateway's business operations, and Mike Hammond stays as head of the company's global operations. Also staying on are William Elliot as general counsel, James Pollard as chief information officer and John Renfro overseeing human resources.

Any remaining officer positions have been eliminated as part of the reorganization, with those executives leaving the company, Gateway said in a news release. Departing in the shake-up are Vice Chairman David Robino; Todd Bradley, executive vice president; Chief Technology Officer Peter Ashkin; and Jack Dollard, senior vice president over operations.

"As of yesterday, my job No. 1 was to get a team in place that I felt could succeed in this environment," Waitt said on the conference call.

The executive shake-up flattens the organization, Gateway's chief executive said. "My management style is a lot different from Jeff's. What I needed was a faster, aggressive, more experienced team," he said. "We're going to move fast and do whatever it takes to succeed."

But turning around Gateway may take some doing, analysts say.

"Consumer (purchasing) is experiencing a slowdown in growth, and Gateway is being hit the hardest because it's 75 percent dependent on the U.S. consumer market," said Technology Business Research analyst Brooks Gray.

Bear Stearns analyst Andrew Neff was of the same mind.

"Gateway's exposure to U.S. consumer markets and the demand weakness therein, leave the company facing a very challenging demand and competitive outlook," he wrote in a research note Tuesday. Gateway has about 8 percent to 9 percent of the U.S. market in PC unit sales and about 4 percent worldwide, and it gets less than 1 percent of its revenue from servers, according to Neff.

Waitt acknowledged he has some catching up to do, "because I really haven't been involved in the day-to-day operations for the last year."

Waitt's quick strategy
Waitt laid out a quick strategy for turning Gateway around: Get the business growing again, realign the cost structure, extend the beyond-the-box business, and focus on direct roots.

Gateway's beyond-the-box strategy entails sales of things other than hardware, such as software, services and training. Throughout 2000, Gateway shifted profitability to these high-margin, nonhardware extras, many delivered through its Country store retail outlets. During the third quarter, beyond-the-box sales accounted for more than 50 percent of Gateway's income.

But with the collapse of PC sales during the fourth quarter, those sales accounted for 100 percent of income, as Gateway made no money at all on hardware.

Waitt said his return to the chief executive's desk signals a reevaluation of the Country stores operation.

"We're committed to Gateway Country," he said. "But we're going to re-examine any additional store openings and any indirect efforts we have out there."

The Country stores had been the centerpiece of Gateway's consumer sales and beyond-the-box strategy. Just two weeks ago, Gateway drafted actor Michael J. Fox for an ad campaign designed to boost brand awareness and drive more traffic into the stores.

"Clearly, regaining sales momentum and readjusting the cost structure in a difficult environment needs to be addressed by Gateway," J.P. Morgan's Walter J. Winnitzki wrote in a Tuesday research note.

Gray said the new management team, particularly the CFO, has much repair work to do.

"The challenge Joe Burke will face in turning Gateway's business into a profitable operation will be quite difficult without outsourcing some manufacturing and consolidating some of the facilities," he said. "I think the first operation to go will be the server business."

The company is scheduled to hold an analyst conference Feb. 28.

"The return of Ted Waitt is a definite positive as we suspect he shares our view that the Gateway value proposition is clearly out of line," UBS Warburg analyst Don Young wrote in a Tuesday-morning research note. "Jeff may have been working to re-establish this, but Ted will accelerate the process."

Given Gateway's problems and an expected consolidation in the PC industry, some analysts have said the company might be absorbed by a rival.

"While Waitt's return would suggest that he is back to fix the problems at Gateway, a sale of the company cannot be ruled out, although one could argue that there's no reason to replace the CEO if a sale is in the works," Neff wrote.

During the conference call, Waitt emphasized he is committed to Gateway and believes the company will recover.

"Is the PC dead?" he asked. "People have predicted the demise of the PC for years, but there's a lot of legs left in the PC."

Still, Waitt said, Gateway would look at evolving alternatives, such as information appliances. "We're going to find out what customers want (and) deliver them the technology that they need."