Gateway widens its loss

PC maker posts $339 million loss. But executives say that thanks to a deal with Best Buy, better times are ahead.

John G. Spooner Staff Writer, CNET News.com
John Spooner
covers the PC market, chips and automotive technology.
John G. Spooner
3 min read
Gateway on Thursday posted a sizable second-quarter loss and lower-than-expected revenue, even as it announced that retailer Best Buy will carry its PCs later this month.

The PC maker reported a loss of $339 million, or 91 cents per share, for the quarter, which ended June 30. Revenue was $838 million. That compares with a loss of $73 million, or 22 cents per share, on $800 million in revenue in the same period a year ago.

On average, analysts surveyed by Thompson First Call expected Gateway to report a loss of 14 cents per share and revenue of $870 million for the quarter.

Excluding the $289 million in restructuring charges, which were related to its March acquisition of eMachines, Gateway would have reported a loss of 13 cents a share. The company said the lower-than-expected revenue stemmed from delayed delivery of some of its products to businesses.

Despite the loss, Gateway executives say they feel that better times are ahead. They pointed to the company's continued push to lower costs and its budding relationships with third-party retailers such as Best Buy, which will begin carrying Gateway-brand notebook PCs later this month.

Best Buy will later add Gateway desktops and display products to its shelves and will continue carrying eMachines-brand computers as well, Gateway said.

"I'm very excited. This is something we worked very hard to achieve," Wayne Inouye, Gateway's CEO, said in an interview with CNET News.com after the earnings release.

Winning commitments from companies such as Best Buy is central to the company's future success, Inouye said. Although Best Buy will stock Gateway's PC monitors, it hasn't yet signed on to carry Gateway televisions.

Since it acquired eMachines in March and appointed Inouye as its CEO, Gateway has been crafting a new business strategy centered around lowering costs and creating computer products that it can sell in mass quantities. To that end, it has closed its chain of retail stores and announced plans to cut its staff to 2,000, resulting in thousands of layoffs.

So far, the company has been making some progress. Gateway sold 795,000 PCs in the quarter, a 32 percent increase from the first quarter and a 62 percent jump from a year ago, reflecting the addition of unit shipments from eMachines.

At the same time, the company lowered its selling, general and administrative costs from 23 percent of its overall revenue in the first quarter to 15 percent in the second quarter, said Gateway Chief Financial Officer Rod Sherwood. The PC maker aims to lower those costs, which are typically comprised primarily of employee salaries, to below 10 percent of revenue. It believes it will hit that level with about 2,000 employees.

What's ahead
Going forward, Gateway expects to see higher revenue and a smaller loss during the third quarter, Sherwood said. Revenue will fall between $900 million and $950 million, the company predicted, while acquisition-related charges of between $40 million and $60 million will result in a loss of between 19 cents and 24 cents. Factoring out the charges, Gateway will report a loss of 7 cents to 9 cents a share, the company said.

Gateway also plans to back off its consumer electronics strategy and put its strength behind PCs.

"We're focused on our core business (PCs) and making money in our core business," Inouye said during a conference call detailing the results for financial analysts. "We are a PC company."

The company will continue to sell televisions, but the fate of many of its other consumer electronics products, including DVD players, digital cameras and MP3 players, is still being evaluated, the company has said. The company has run out of stock on many of those products without planning to replace them immediately.

"The fact is that we were not making a lot of money in the (consumer electronics) area at all," Inouye said.

But Gateway will offer what it calls convergence products in the near future, he said, without going into details. Those products are likely to combine elements of PCs and consumer electronics devices.

Meanwhile, the company also is eyeing international expansion. It is close to making announcements related to activities in Japan and in Germany, Inouye said.