Some Gateway Numbers Stay Inside the
Box
By GRETCHEN MORGENSON
s the dark and stormy night descended upon technology
companies in the third quarter of 2000, the results of Gateway
shone like a beacon. On Oct. 12, the company said its revenues had
grown 16 percent in the quarter from the comparable period of 1999,
while earnings per share rose 31 percent. "The sky is not falling," said
John Todd, Gateway's chief financial officer.
Relieved investors have since bid up Gateway's stock 31 percent. But a
closer look at the numbers finds less there than meets the eye.
What Gateway did not say in its report was that sales of its personal
computers were essentially flat in the quarter, at $1.948 billion. And
earnings on those sales actually fell 21 percent.
That might not be troubling, except that Gateway has added 800 retail
outlets in the last year. Enormous expansions do not usually produce flat
sales.
So where did Gateway get its growth? From its so-called
beyond-the-box business — sales of Internet service, warranties,
financing customer purchases and so on. "Gateway is quickly realizing its
goal of becoming a true solutions provider, not just a hardware seller,"
Mr. Todd said.
Because the company is not a pure computer concern any more, Mr.
Todd has told investors that he will eliminate some data from its reports.
Gateway's new policy, under the Securities and Exchange Commission's
fair disclosure regulation, or F.D., means that it will no longer report
average unit prices on the computers it sells, or the number of units sold
in a quarter. "This isn't an issue about getting information; it is about
limiting our risk to selective disclosure," Mr. Todd said.
But Jack Ciesielski, the accounting authority and president of R. G.
Associates in Baltimore, said: "Sounds like they're wrapping the F.D. flag
around them and using it to their advantage. If there's a change in a
company's business from one that's pretty straightforward, selling boxes,
to something much more stretchy, nobody's being aided by having less
information."
For instance, Gateway reveals little about what it includes on its balance
sheet in "other assets," current or long term. Together, these assets
ballooned to $1.53 billion in the third quarter, 20 percent more than on
June 30.
About half of this figure, Mr. Todd said, is loans the company made to
people buying computers. Customers can now get loans from Gateway
Bank.
It is possible that all of Gateway's customers are creditworthy and that
their loans will be paid in full. But Gateway's annual interest rates range
from 14.99 percent to 28.99 percent, suggesting that some buyers' credit
records may not be sterling.
How much is Gateway setting aside as a reserve against loans that might
go bad? The company will not say, other than to explain that the loans
the company carries on its books are net of reserves. Unlike other
companies, Gateway provides no details in its footnotes about how much
in reserves it has deducted from the loans. Mr. Todd said the figure is
immaterial, and that Gateway takes a very conservative approach to
reserves.
Baruch Lev, professor of accounting at New York University's Stern
School of Business said the amount should be disclosed. "People have to
be able to compare it over time and compare it with competitors," he
said. "If they don't put it in a footnote, that is in my opinion not good
disclosure."
Now that Gateway has a big retail presence — 1,052 stores, with plans
for 3,000 — will the company start giving same-store sales data, for
stores open at least a year? Not anytime soon, it said, arguing that the
data is irrelevant because a typical sale involves four visits to its various
channels.
It is to be expected that Mr. Todd will accentuate the positive at
Gateway. His biography on its Web site, for instance, omits his one-year
stint as chief financial officer at a subsidiary of Boston Chicken, a
restaurant chain that filed for bankruptcy protection in 1998. (He left in
1997.) Asked about the omission, Gateway said on Friday that the
information would be added to his biography.
Gateway wants investors to rely on it to tell them what is important in
their numbers. Wall Street analysts seem agreeable; nobody asked about
reserves or loan quality after the earnings report. But in this, the
information age, less is not more. |
