Gateway Slashes Its Year-Ahead Outlook

Feb 28 2001

SAN DIEGO - Gateway Inc., the No. 2 direct seller of personal computers in the United States, said on Wednesday it would lose money after charges in the first half of 2001 -- falling far short of Wall Street expectations -- amid a slowdown in PC sales The warning, which was coupled with Gateway's restatement of last year's earnings, was just the latest in a slew of bad news for computer makers, hard hit by a price war and sluggish sales Gateway estimated it would take charges of between $150 million and $275 million in the first quarter, including a previously announced estimate of $50 million for job cuts and other items The bigger charges are primarily for restructuring to refocus on Gateway's core business of selling PCs -- and de-emphasizing its "beyond the box" strategy of selling services and computer peripherals The restructuring could include closing under-performing retail stores and possibly exiting some international markets. Executives also said they were scrapping plans to open 60 new stores this year Excluding the charges, Gateway said it would break even in the first half of 2001. Wall Street analysts had been expecting the company to post a profit of 17 cents a share in the first quarter, according to First Call/Thomson Financial Unit sales in the first quarter are expected to be down slightly year-over-year, the company said.

"As for the rest of 2001, we expect to continue operating the business on a break-even basis through the first half of the year, with a planned return to profitability and unit growth on a year-over-year basis during the second half," Ted Waitt, Gateway chairman and chief executive, said in a statement Gateway, which was forced to restate its fourth-quarter results, said it planned to return to profitability in the second half. The restatement was largely due to having to write down investments in other technology companies Waitt, the co-founder who retook his former position of chief executive officer at the end of January, said he was looking to cut costs, and that there would be a review of how to do so over the next month.

"We're maniacally focused on our cost structure," he told analysts at a meeting in San Diego Gateway stock fell to $16 in after-hours trading from its close of $17.20 on the New York Stock Exchange , where it had gained 48 cents on the day Gateway stock has performed roughly in line with the S&P 500 index since the beginning of this year but is near the bottom of its $15.30-$73.00 range for the last 52 weeks Waitt said that after a slowdown this year, he expected the company's profits to return to a sustainable level of net income growth next year -- suggesting that he expects the business to normalize.

"This is our 2002 model, we feel we can achieve approximately a 7 percent operating margin, which leads to a 5 percent net income model," he said.

"My main goal is how we exit the year," said Waitt. "It's going to take a year to get there. As a part of the revised results, the company increased by $75 million the fourth-quarter pre-tax charge to earnings related to the write-down of its investments in technology-based companies The impact on earnings of the restatement and revision of previously announced fourth-quarter results lowered full-year net income by about $74.5 million, or 22 cents per share. About 14 cents of this was related to the write-down of such investments in the fourth quarter As a result of the full year changes, which include adoption of new accounting principles, Gateway reported fiscal 2000 profits of $241.5 million on revenues of $9.6 billion, or 73 cents per diluted share Gateway also said that on Feb. 16 it had sold about $500 million in finance receivables at book value, leaving it with about $300 million in finance receivables before reserves for loans to its customers. Cash from the sale will be used for general corporate purposes, Gateway said As of February 16, Gateway had a balance of about $1.0 billion in cash and marketable securities Waitt blamed Gateway's recent troubles on its failure to satisfy customers, as well as on the weak economy.

"We have to have a successful box business if we are going to go beyond the box," Waitt said, responding to criticism that the company had lost its focus on selling computers.

"You have to be competitive and build a profitable box business, and that's what we are going to do." Copyright 2001, Reuters News Service