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THE DAY AHEAD: Gateway looks beyond the box to boost B2B sales

Gateway Inc. (NYSE: GTW) is hoping its "beyond the box" strategy can boost its business-to-business sales. Given the success Gateway has had with the consumer market, the company just might pull it off.

Gateway topped Wall Street estimates Thursday with second quarter earnings of 37 cents a share on sales of $2.14 billion. The results gave analysts a little bit of relief. Reports of soft consumer sales had some Gateway watchers worried about the quarter.

The big takeaway from the quarter is that Gateway can grow profits with only one of its target markets working. The consumer market accounted for Gateway's growth as business sales were sluggish in the U.S. and abroad.

The PC vendor had 40 percent of its sales from beyond the box, which include Internet service accounts, software sales and educational and training programs. Gateway raised its projection of non-PC income to 45 percent of net from 40 percent by the end of the year.

Without strong consumer demand and beyond the box revenue, Gateway would be on the ropes.

That point isn't lost on analysts, who spent a lot of their time quizzing Gateway CEO Jeff Weitzen about business sales on the earnings conference call. Bear Stearns analyst Andy Neff asked Gateway execs what they could do to boost revenue growth, which has been "anemic of late." For the record, Gateway's second quarter sales were up 12 percent from a year ago. Sales were down 8 percent from the first quarter. Profit growth is nearly triple revenue growth.

If Gateway could garner any kind of business sales momentum, it would be a big hit on Wall Street. Business sales are about 37 percent of Gateway's sales.

Instead, second quarter business sales were down 10 percent from a year ago. At least that's an improvement -- the business sales slump was even worse in the first quarter, down 19 percent. In the third quarter, business sales will be flat and show some growth in the fourth quarter.

When it comes to Gateway's business sales, that projection counts as good news. "We're not happy with business-to-business, but we stopped the decline," said CFO John Todd.

So what's the plan? Gateway plans to leverage its small business sales with extra features such as Web hosting and establishing a local presence with its Country Stores. Other beyond the box revenue streams will derive from financing, training and software. Currently, beyond the box business revenue is slight, but that's about to change, according to execs.

Weitzen said beyond the box business sales could generate a lot of revenue upside. "There could be more beyond the box revenue in business-to-business than consumer," said Weitzen. The CEO said the company will accelerate its business-to-business initiatives in the second half.

Weitzen added that it will announce a host of other partners to provide business services. The company also plans some initiatives that revolve around Gateway's Country Stores and Office Max store-within-a-store outlets. Weitzen wouldn't give details, but promised it would be trend setting. The goal is to boost business sales by 15 percent a year, said Gateway.

Now about that alleged consumer slowdown

If you didn't know any better you would have sworn that Todd was dishing out a few jabs at Gateway's rivals. "Consumer sales accelerated in a market that was alleged to be soft," he said.

A few minutes later, Todd dropped in a few more sales references. "Beyond the box revenue offset alleged retail market tightness," he said.

Now Todd didn't name names, but it seems logical that he was referring to eMachines' (Nasdaq: EEEE) profit warning last month. In that warning, eMachines blamed Fed chief Alan Greenspan, inventory woes and pricing pressure from other box makers such as Compaq (NYSE: CPQ) and Hewlett-Packard (NYSE: HWP) for its problems.

Compaq said its inventory was fine, and HP said it was on target with its quarter. Gateway obviously had no problems in the consumer market. The implication is clear: eMachines' problems are its own doing. That's not too surprising -- eMachines' profit warning excuses sounded a bit weak from the beginning.TDAIN

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