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Gateway trims loss in third quarter

PC maker sees potential profit at the end of the tunnel, boosted by new sales strategy.

Gateway on Thursday posted a narrower third-quarter loss, helped by cost cuts and an increase in PC unit shipments, that could enable it to climb ever closer to turning a profit.

The Irvine, Calif., PC maker reported a loss of $59 million, or 16 cents per share, for the quarter ended Sept. 30. Revenue was $915 million. That compares with a loss of $139 million, or 43 cents per share, on $883 million in revenue in the same period a year ago.

Excluding charges for restructuring, mainly related to its acquisition of eMachines, Gateway said it turned a profit of $4 million, or 1 cent per share, besting analysts' estimates. It was the company's first operational profit since the fourth quarter of 2001.

On average, analysts surveyed by Thomson First Call expected Gateway to report a loss of 7 cents per share and revenue of $936 million for the quarter. Gateway's own projection for the quarter was for revenue to fall between $900 million and $950 million and to announce a loss of 7 cents to 9 cents a share before charges.

During the third quarter, Gateway sold 931,000 PCs, up 17 percent sequentially and 67 percent from the same period last year. While the year-over-year increase is mainly attributable to the addition of sales of eMachines models, Gateway has made gains in the retail market with Gateway-brand PCs, executives said. It has also benefited from acceleration in its cost-cutting efforts, they added, putting it on track for returning to profitability. The bulk of Gateway's revenue comes from its PC sales.

"I do believe we are on track," said Wayne Inouye, Gateway's CEO, in an interview Thursday with CNET "We're at the beginning of a journey. We certainly have a lot more to do as a company?but we're gaining traction at retail. We're seeing margin improvement in all segments ,and we just kicked off our convergence strategy" for selling electronics devices.

The PC maker, which acquired eMachines in March, has been working since then to implement a new business strategy centered on selling larger numbers of PCs via third-party retail stores such as Best Buy, and directly to consumers and businesses. The plan largely reverses Gateway's 2003 efforts to become a consumer electronics brand by selling products like digital cameras and DVD players. Although Gateway continues to sell big-screen televisions and what it calls "convergence devices," such as its $249 miniature MP3 player, which either work with or act like a PC.

To help reach profitability, which it hopes to do as soon as next quarter, Gateway has reduced its operating costs considerably through large-scale staff cutbacks and by closing its chain of retail stores.

"The key is that we were able to accelerate cost reductions across the board" during the quarter, said Rod Sherwood, Gateway's chief financial officer, in an interview with CNET

Gateway streamlined its manufacturing during the quarter, for example, transitioning PC manufacturing to third parties--a move it said cut desktop PC production costs by 7 percent.

The company's fourth-quarter forecast is for revenue of between $975 million and $1 billion and earnings per share of 1 cent to 2 cents, before charges.

The company predicts that its fourth-quarter charges will equal about 1 cent per share. As a result, it predicts that earnings will break even or show a profit of 1 cent, based on GAAP (Generally Accepted Accounting Principles).

Gateway's long-term goals include expanding its PC sales in Japan and Europe, where its eMachines-brand PCs have a presence but Gateway-brand PCs don't. The company will launch Gateway-brand PCs in Japan within the next 30 days, Inouye said during an earnings conference call discussion with financial analysts.