Hard landing: Gateway blames consumer demand for profit meltdown

Just when technology investors thought it couldn't get any worse, Gateway announced after the bell Wednesday that it will miss analysts' estimates by a country mile in its fourth quarter.

The PC maker said it will report sales of around $2.55 billion in the quarter, roughly half a billion dollars below current analysts' estimates and flat from the year-ago period.

Worse yet, Gateway said it will post operating earnings of 37 cents a share, woefully shy of the First Call Corp. consensus estimate of 62 cents a share.

Gateway (NYSE: GTW) shares closed off $1.50 to $29.50 ahead of the profit warning before plunging to around $20 a share in after-hours trading.

But that's not all.

Gateway officials said it will take a $200 million write-down charge for its investments in other technology stocks, meaning it will post a net loss of 2 cents a share in the quarter.

It also lowered its fiscal 2001 earnings estimate to $1.89 a share from the current First Call Corp. estimates of $2.28 a share and said it expects sluggish PC sales for "the next 12 to 18 months."

Macroeconomic issues

On a conference call with analysts, CEO Jeff Weitzen said the earnings miss was "purely a matter of consumer demand, and not execution." Weitzen made a macroeconomic argument for Gateway's problems. CFO John Todd cited slowing gross domestic product figures, altered seasonal trends and weak consumer spending for the woes.

Analysts questioned whether Weitzen was jumping the gun with talking down a whole quarter based on one long weekend. Weitzen said he didn't see anything in the numbers that would indicate a sales rebound. Roughly 50 percent of Gateway's December quarter sales are derived from the holiday shopping season.

Todd said the company saw a decent sales ramp from Nov. 15 to Thanksgiving, but the sales for Thanksgiving weekend were down 30 percent compared to a year ago.

"The miss over the weekend was too significant to maintain previous guidance," he said.

The Thanksgiving sales are likely to worry Wall Street even more. A slew of analysts have flagged concerns about consumer PC vendors, including Apple (Nasdaq: AAPL), Compaq (NYSE: CPQ) and Hewlett-Packard (NYSE: HWP).

Todd said officials were surprised by the severity of the demand downturn. He said PC sales in the first quarter of 2001 will be down 8 percent and flat for the remainder of the year. He also said he anticipated a price war to clear out inventory.

Analyst makes the call

Before it all hit the fan, Merrill Lynch analyst Steve Fortuna cut his fourth-quarter sales target but it turns out that he was far too optimistic.

He sliced his sales estimate to $3.04 billion, roughly a 24 percent improvement from the year-ago quarter, while leaving his earnings-per-share estimate unchanged at 63 cents.

"For the all-important kick-off to the retail selling season, we believe that volumes showed significant improvement over pre-holiday weeks but were not quite as strong as originally hoped for," he wrote in a research report.

Still insulated

Despite the current problems, Gateway officials said the company is prepared for the day when PC sales stay flat. The company's "beyond the box" revenue continues to boost the bottom line. Some analysts have called Gateway's model the best in the industry.

Gateway also said it wouldn't have long-term inventory issues because of its direct sales model

"While our current quarter results are disappointing, we still expect to deliver 25 percent net income growth this year prior to the write-off, which will be among the best in the industry," said Weitzen in a prepared release. "We also believe we have the right strategy, and are executing well against it. We remain confident that we're on the right track and that we will continue to distance ourselves from traditional competitors in 2001."

Last quarter, Gateway met analysts' estimates, earning $152.6 million, or 46 cents a share, on sales of $2.53 billion.

The stock moved as high as $81.50 last November.

Nineteen of the 22 analysts following the stock maintain either a "buy" or "strong buy" recommendation.

Larry Dignan contributed to this report.

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