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Gateway lays off 300 employees

Gateway says that it will cut 300 employees--roughly 2 percent of its workforce--as it undergoes a restructuring.

Gateway (GTW) said today that it will cut 300 employees worldwide as it undergoes a restructuring.

The cuts represent roughly 2 percent of the mail-order computer maker?s worldwide workforce of around 12,000.

Despite the cuts, Gateway said it continues to hire in some areas of its business. But the company declined to elaborate on the layoffs or the restructuring beyond its brief statement.

Greg Lund, a company spokesman, also declined to comment on whether the company anticipates taking a charge in the quarter as a result of the layoffs.

He also noted that the company currently would provide its statement on the layoffs only if an interested party calls, rather than put it out for wide distribution within the investment community.

Gateway's problems appear to be arising more out of overreaching ambitions to become a supplier of PCs to large corporate customers rather than any underlying market erosion. Early in the year, Gateway announced that it would aggressively attempt to pierce the general corporate market. To this end, the company bought ALR Research and ramped up investments in its field forces.

Unfortunately for Gateway, corporate buyers have not responded quickly, or in huge numbers, to the company's pitch, thereby tripping up the corporate push.

"They are seeing unit growth, but not the kind of ASPs or profitability that they thought they would," said Daniel Kunstler, technology analyst for J.P. Morgan Securities.

Interestingly, Gateway's prices for a variety of configurations actually were lower than Dell's in March, he said. Still, that hasn't been enough to overcome "the sales and marketing panache" of Dell. "As opposed to nipping at their heels, they are trailing in execution," Kunstler said.

Kunstler also noted that Gateway's strategy of aggressive adoption of the Pentium II chip was misplaced. "They had a lot riding on the Pentium II and the sweet spot isn't there yet," he said.

Kunstler predicted the company would earn 13 cents a share, down from 39 cents for the same quarter the year before. For the coming quarter, Kunstler predicted earnings of 47 cents a share, down from 56 cents a share the quarter before.

"It's not like their business is failing. They've been doing OK. The real issue with them has been this push into the enterprise," said Kevin Hause, an analyst at International Data Corporation. "They overestimated the demand. They weren't realistic."

Hause pointed out that most large enterprise customers have had established relationships with PC vendors for years. Breaking into these accounts, therefore, can take tremendous amounts of legwork.

"It took Dell years and years and years to become an enterprise player," Hause said.

Asif Hudani, president of NovaQuest InfoSystems, a large corporate reseller, said that the abilities of Compaq to put together build-to-order manufacturing systems also has put pressure on the mail-order vendors.

"You've seen these guys peak," Hudani said. "It's a smart move for Gateway to tighten up its belt."