WSJ on GTW:
SAN FRANCISCO -- Investors punished Gateway Inc.'s stock on Friday after the personal-computer maker missed Wall Street's second-quarter profit estimates, but some analysts saw a silver lining for the PC sector in the company's report.
Shares of the North Sioux City, S.D., personal-computer maker lost 6 1/8, or 10%, to 52 5/8 in New York Stock Exchange composite trading.
Meanwhile, the Nasdaq Composite Index lost 4.23 to 1930.99, while Morgan Stanley's high-tech 35 index fell 8.27 to 609.53.
Gateway investors were responding to a disappointing earnings report, released after the market closed Thursday, in which the company said second-quarter profit increased 7.4% over the year-earlier period to $60.7 million, or 38 cents a diluted share, but fell considerably short of the consensus estimate of analysts surveyed by First Call for 44 cents a share. Revenue, meanwhile, rose 17% to $1.62 billion from $1.39 billion a year earlier.
Gateway blamed the shortfall on a decline in the average selling price of its PCs, which sank 12% in the quarter to $2,200, and $20 million in additional marketing expenses related to a stepped-up promotional campaign for its products.
The miss prompted some leading Wall Street firms to cut their investment ratings on Gateway, including Prudential Securities Inc., which dropped the company to "hold" from "buy," and Lehman Brothers Inc., which slashed it to "neutral" from "buy."
But other analysts reacted differently to Gateway's quarter. Richard Gardner, an analyst at Salomon Smith Barney Inc., upped his rating to "buy" from "outperform," saying that the company's YourWare promotional campaign -- an effort to sell hardware, software and Internet access together and push a new financing program for customers -- started to benefit the company towards the end of the quarter.
"The quarter was a disaster, but it got better at the end," said Mr. Gardner. "That points to better results in the second half of 1998," he said.
Those results aren't expected to improve immediately though. Mr. Gardner trimmed his third-quarter estimate sharply to 48 cents a share from 57 cents a share because of an expectation that high marketing expenses will continue. But he boosted fourth-quarter projections to 85 cents a share from 81 cents a share based on the belief that the promotional campaign will lift Gateway during the crucial holiday shopping season. Mr. Gardner also raised his 1999 earnings estimate to $2.95 a share from $2.85 a share.
"I think they sacrificed this quarter as an investment for the future," said Mr. Gardner.
Dan Niles, of BancAmerica Robertson Stephens & Co., wasn't among the analysts who reacted negatively to the dip in Gateway's average selling prices. In fact, Mr. Niles said he was expecting worse from the company considering cost-cutting on PCs by Compaq Computer, International Business Machines and Hewlett-Packard -- three of the biggest PC sellers, all of whom have been working aggressively to reduce inventories in distribution channels. Gateway is best known for selling its products directly to customers through Internet and telephone orders, but it also has opened a series of "country store" retail outlets.
"Given what's going on in the channel ... to have Gateway's [average selling prices] go down that little -- it's not that much," said Mr. Niles.
Mr. Niles added that he was impressed with year-over-year growth in the number of PCs sold by Gateway, which increased 33% to 736,000 units during the second quarter. That growth bodes well for other PC makers, particularly Dell Computer, he believes. Although Mr. Niles predicts Dell's average selling prices will fall about 4% sequentially this quarter to $2,400 from $2,485, "unit growth should be enormous."
And unlike Gateway, "Dell didn't have any new marketing push," he added. "They benefited from component cost declines so gross margins should be coming up."
Gateway certainly benefited from the sinking cost of parts, including memory chips, disk drives and displays, for its computers. Gross profit margins hit a record 20.6%, up from 19.5% in the first quarter.
But some analysts warn that falling component prices can't save the company's margins forever, particularly as average selling prices continue to drop. "There's a question of how low can you go," said Ashok Kumar of Piper Jaffray Inc. "Once that slope starts flattening out, you're up a creek," he said |
