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Gateway earnings hurt by AOL dispute

The PC manufacturer reports a deeper fourth-quarter loss because of a 3 cent charge associated with an America Online dispute.

Gateway reported a wider-than-expected fourth-quarter loss on Wednesday, because of a 3 cent charge associated with an America Online dispute.

As a result of the charge, the Poway, Calif.-based PC manufacturer reported a loss of $72 million, or 22 cents per share, for the quarter ended Dec. 31. Excluding the charge, Gateway posted a loss of 19 cents per share. Sales for the quarter were $1.06 billion.

Gateway's AOL dispute concerns payments the online giant made to Gateway for the PC maker's efforts to generate AOL subscribers. Gateway said in a statement that AOL "recomputed payments it had made in 2001 and in the first half of 2002, and withheld the claimed overpayments from amounts currently owed to Gateway."

The company, which disputes the withholdings, reduced its 2002 revenue and earnings by the amount of the adjustment, which resulted in the charge, the company said.

AOL could not be reached for comment.

Without the charge, Gateway met analysts' reduced expectations, as well as its own predictions.

Gateway warned of a wider-than-expected loss on Jan. 7, when it said slower fourth-quarter demand for its PCs would result in a loss of between 18 cents and 19 cents per share. The company originally had projected a loss of 10 cents to 13 cents per share for the quarter.

At the time of the earnings warning, Gateway said that it might take an additional loss of up to 3 cents per share because of a dispute with a partner it did not name.

After the warning, analysts had expected the direct PC seller to post a quarterly loss of 19 cents per share on revenue of $1.06 billion, according to a survey conducted by First Call.

For the full year, Gateway reported a loss of $309 million, or 95 cents per share, including charges, on revenue of $4.2 billion.

Analysts had expected Gateway to deliver a loss of 73 cents per share for the year, on revenue of $4.2 billion.

Gateway exited the year with $1.07 billion in cash, on target with previous predictions.

Wednesday's earnings report marks the one-year anniversary of an aggressive new marketing strategy Gateway launched after seeing its sales slow during the fourth quarter of 2001.

That plan, designed to win market share by offering aggressive prices, has worked for the most part, analysts say. "From that perspective, unit shipment levels have risen slowly," said Roger Kay, an analyst with IDC.

Gateway increased its unit shipments in the United States in three quarters in 2002, climbing from 645,000 units in the first quarter to a peak of 729,000 in the third, according to IDC. The PC maker said it shipped 720,000 units during the fourth quarter.

Strategy shift
However, Gateway executives plan to further shift the company's strategy in 2003, to ensure that it returns to profitability, Ted Waitt, Gateway's CEO, said during a conference call with analysts and the press.

The company intends to combine new products, fresh executive appointments and cost savings to sharpen its business model, increase margins and compete more effectively in the consumer and business segments of the PC market, Waitt said.

On the consumer side, Gateway plans to introduce throughout the year new PCs, consumer electronics products, and "digital solutions"--devices that tie PCs, consumer electronics, and digital audio, video and home networking, he said.

At the same time, the company plans to renew efforts to pursue business customers by adding people to its business sales force and changing its store strategy, said Rod Sherwood, Gateway's chief financial officer.

Analysts have said the PC maker could cut costs by streamlining its chain of stores. Along that line, Gateway plans to evaluate more than 120 store leases that will come up this year, Sherwood said. The company has already closed four store locations this year. Other stores may be relocated.

But Gateway continues to believe that the stores are an important part of its business, Sherwood emphasized. Some of the company's new executives will have the task of "developing a profitable business there," Waitt said.

The company did not offer any guidance on earnings per share or revenue for the first quarter of 2003, because of limited visibility into product demand for the quarter, executives said.

Instead, "we will likely provide additional input later on in the quarter, probably somewhere in the March time frame," Sherwood said.

The executives added that if the adjustments made by AOL end up being appropriate, Gateway will see a future reduction in revenue of $3 million to $5 million per quarter.

In related news, Sherwood confirmed that Gateway had received a Wells Notice from the U.S. Securities and Exchange Commission. The notice allows a company to mount an argument for why it should not be charged in a case. Gateway is being investigated by the SEC.