Gateway Posts Loss as Sales Slide 32%, While Rival Dell Remains on Track
By GARY MCWILLIAMS
Staff Reporter of THE WALL STREET JOURNAL
Gateway Inc. swung to a larger-than-expected second-quarter loss, with revenue plummeting 32%, as the struggling personal-computer maker said it would consider a broader restructuring as its outlook dims for the rest of the year.
Gateway now doesn't expect to report a profit, excluding charges, for the last two quarters of the year, according to Chief Financial Officer Joseph Burke. Instead, he projected break-even results for the second half, and said unit sales for the next two quarters likely will lag behind those recorded during the same periods last year. The company previously had forecast a return to profitability this year.
Gateway Unveils Plan to Beat Rival Computer-Makers' Prices (May 31)
Juno and Gateway Agree to Settle 'Free' Internet Service Ad Dispute (May 16)
Gateway Reports Net Loss on Restructuring Charges (April 20)
Separately, rival Dell Computer Corp., which sells largely to the small business and corporate markets, said it expects to meet its estimates for fiscal second-quarter revenue and profit, excluding charges.
Gateway, of San Diego, reported a loss of $20.8 million, or six cents a share, compared with net income of $118.1 million, or 36 cents a diluted share, a year ago. Gateway has struggled all year with high costs and weak demand for its home PCs.
Excluding $44 million in charges and a gain, the company would have had a loss of $9 million, or two cents a share, in the quarter. Gateway said the charges included $24 million in restructuring costs and $20 million to write down the value of bad investments. The company also reported a $20 million gain from a discontinued loan portfolio. Excluding the items, analysts expected a slightly narrower loss of a penny a share, according to Thomson Financial/First Call.
Gateway's revenue of $1.5 billion was a huge drop from $2.21 billion a year ago, and unit sales were down 21%.
At 4 p.m. Thursday in New York Stock Exchange composite trading, before it disclosed the results, Gateway was down 88 cents at $14.59. The shares fell to $13 in after-hours trading. Dell was up $1.18 at $28.38 at 4 p.m. on the Nasdaq Stock Market, before sliding to $28.07 in after-hours trading.
Gateway Chief Executive Ted Waitt said revenue from the company's mainstay U.S. home-PC operation fell 42% from a year ago, as unit sales tumbled 36% and the average selling price fell. The fall in unit sales was steeper than the 19% decline in the first quarter.
Outside the U.S., Gateway's revenue fell 50% on weakness in its consumer business in Europe, and on a sharp drop in unit sales and average price in Asia, he said. Revenue from business customers fell 9%, even as units rose 9%, Mr. Waitt said. About $200 million of the revenue decline came from the company's decision to halt sales to high-risk customers.
The company said the average selling price of its PCs fell 13% to $1,501 from $1,723 in the first quarter, reflecting lower prices industrywide and the company's decision to match rivals' prices. Gross profit margins, or the profit after manufacturing costs, fell to 19% from 23% a year ago.
Gateway plans to further restructure operations in the next several months, including a new round of staff reductions, Mr. Waitt said. Gateway has cut 4,000 employees since December, bringing its work force to 20,000, he said.
The company already is combining its U.S. consumer and business operations, and is creating a new unit to focus on communications and mobile PC markets, he said. The changes are expected to reduce third-quarter earnings by between $25 million and $30 million.
Mr. Waitt said the company next will consider a major overhaul of its business operations. He declined to specify any planned actions but said they include the possibility of outsourcing assembly for the vast majority of its PCs.
As a result of disappointing sales, Gateway will drop the price-matching advertising campaign it launched in May to lure customers to its stores, Mr. Waitt said. "You'll see it winding down," as the company focuses instead on marketing its software and services bundles, he said.
Meanwhile, Dell, of Austin, Texas, told investors attending its annual meeting that it expects to report a profit of 16 cents a share on revenue of $7.6 billion, in line with prior expectations. That doesn't include charges, which Dell said would increase to $700 million from a previously expected $250 million to $350 million.
Dell said it plans to write down some investments in its Dell Ventures investment portfolio and record larger-than-expected charges for plant closings and asset write-downs. The company's fiscal second quarter ends Aug. 3.
Write to Gary McWilliams at gary.mcwilliams@wsj.com |
