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Gateway sticks to break-even forecast

UPDATE Gateway still expects to break even in the first half of this year, but it will come after a furious bout of cost-cutting in the first quarter, executives said Thursday.

"We're making a lot of progress as to the health of our operations," CEO Ted Waitt said, during a conference call with analysts.

The PC maker reported a pre-tax operating loss of $6 million, or a penny per share after taxes, excluding special charges on first-quarter revenue of $2.03 billion. Those results were essentially in line with the consensus forecast of earnings tracking firm First Call.

Shares of Gateway traded at $17.75 in after-hours activity on the Island ECN, following the report. Gateway rose 72 cents to $18.02 in Thursday's regular trading ahead of the news.

Executives stuck to their earlier forecast of break-even results for Gateway's first half, with unit sales falling year-over-year. The company sees a profit in the second half, with unit sales increasing from the year-ago period.

Company executives declined to provide specific forecasts for revenue and earnings.

However, Gateway (NYSE: GTW) recorded one-time costs of $533 million in the first quarter, including charges related to job cuts, write-offs of bad loans to consumers, write-offs of acquired technology, goodwill write-downs and store closings.

Gateway, which previously said it would close unprofitable stores, shut down 27 Country Stores in March and is closing its "store-within-a-store" sites at OfficeMax (NYSE: OMX) locations. Gateway currently has about 700 OfficeMax stores, a Gateway spokeswoman said.

Including special charges, Gateway lost $503 million, or $1.56 per share, in the first quarter.

Those one-time charges are far higher than originally forecast by the company. But the decision to slash so many costs in one quarter is understandable, given the company's executive changes, said Brett Miller, analyst with A.G. Edwards & Co. Gateway founder Ted Waitt, who returned to his old job as CEO earlier this year, has replaced several top executives in recent months.

"When you've got a new management team, and no one is expecting much in the way of results yet, that's the time to throw everything in there, as far as charges and cuts," Miller said.

Most of the company's job cuts and closures have already been unveiled, said Joe Burke, Gateway's chief financial officer.

"I think we've basically announced all of the store closings we're going to have," Burke said, during a telephone interview.

The company still expects its operations to report break-even results for the first half of the year, Burke said. Gateway plans to record special charges of $25 million and $10 million in the second and third quarters, respectively.

Earnings and revenue growth will be hard to predict until Gateway gets its sales, general and administrative costs (SG&A) under control, Bernstein analyst Vadim Zlotnikov said.

"They have made reasonably good headway," Zlotnikov said. "But in the end, they still have a fair bit of work to do in reducing SG&A. Until that happens, their hands are tied. Until you get your costs in line, you can't really talk about revenue growth."

Excluding special charges, sales, general and administrative costs consumed almost 19 percent of Gateway's first-quarter revenue. That figure can't be any higher than 13 percent for Gateway to boost earnings consistently, said Zlotnikov, adding that SG&A costs could fall to 15 to 16 percent of revenue by the third quarter. It should fall to 13 percent sometime next year, Zlotnikov said.

The company is moving in the right direction, Miller and Zlotnikov said. "They hit the key issues," Miller said. "It's just a matter of execution."

Gateway's share price has fallen 75 percent from its 52-week high. Now might be the time to return to the stock for investors willing to wait six to nine months, Zlotnikov said.

"I'm not even sure there's a real downside risk to the stock, maybe a buck or two," he said. "The issue is a catalyst, and that comes in the third quarter, with the SG&A improvements."

Ian Fried contributed to this story.>