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Technology Stocks : Gateway (GTW) -- Ignore unavailable to you. Want to Upgrade?

To: D. Swiss who wrote (7266)	7/12/1999 3:18:00 PM
From: Edwin S. Fujinaka	Read Replies (1) \| Respond to of 8002

Today's Wall Street Journal: July 12, 1999 Heard on the Street Gateway Smoothes Earnings With Internet-Access Business By GARY MCWILLIAMS Staff Reporter of THE WALL STREET JOURNAL Is Gateway poised to put aside its image as an erratic performer and become a hot high-tech stock again? Shares of the consumer-PC maker have slumped 20% from their 52-week high, dogged by the perception that plummeting computer prices will pinch growth. But some money managers who own the stock are seeing another picture emerge at the North Sioux City, S.D., company: an overhauled management team delivering more consistent earnings growth. Rob Joseph, vice president and equity analyst at State Street Research & Management in Boston, says he thinks the Street is missing the changes at the company, formerly named Gateway 2000, which has annual sales of $7.5 billion. With 10 of 15 top managers -- including Jeffrey Weitzen, chief operating officer, and John J. Todd, chief financial officer -- new to the firm in the past 18 months, "the Street isn't giving credit to the new management team yet. The evidence so far is positive," he says. Under that team, Gateway was the first PC company to introduce consumer-PC leases and the first to broadly offer Internet-access services. He predicts that if Gateway's second-quarter earnings, due out July 22, hit analysts' expectations of 55 cents a share, "we should see the [price-to-earnings] multiple move up nicely." Here's his reasoning: Gateway now trades at 21 times the next four quarters' earnings projections, despite analysts' "conservative" forecast of 20% annual revenue and earnings growth. That compares with 33 times earnings at International Business Machines and 43 times at Sun Microsystems. "We're heading into the strongest part of the year for Gateway. If the consumer economy hangs in there, I think they'll have great numbers," he says. A key hurdle for the company is smoothing out the ups and downs of the consumer-PC business, says Philip C. Rueppel, managing director at Deutsche Banc Alex. Brown, who is bullish on the stock. There, Gateway is moving to provide an annuity-like profit stream from its fast-growing Gateway.net Internet access business. The company says in the last three months it has doubled the number of subscribers to 400,000. Gateway is planning to woo its five million customers who aren't now subscribers with mass mailings. Next week, it will send software to 600,000 customers and follow with additional mailings in the third and fourth quarters, says Mr. Weitzen, who is also president. It also plans to pursue non-Gateway customers with sales pitches at its Gateway Country retail stores. Until now, the firm recruited solely from the ranks of new buyers. Mr. Weitzen says the company expects the mailings and other offers to double existing subscribers to 800,000 by year's end. If it can sustain the current growth rate, Gateway could have three million Internet subscribers by the end of 2000, making it the second-largest Internet-service provider after America Online. However, Warburg Dillon Read analyst Charles R. Wolf notes that the profitability of the ISP business isn't guaranteed. "But if you go through the numbers, they have the best model out there for consumer ISP," he says. Gateway also confirmed two weeks ago it has held talks with consumer Internet service provider EarthLink Inc., which has one million subscribers, after rumors of merger talks hit Wall Street. Shares in Gateway initially declined as a result of the talks, but recovered as analysts discounted an acquisition that would dilute earnings. Gateway closed on Friday at 67 5/8, up 1 9/16, on the Big Board. But that's far below the 52-week high of 84 1/2. Mr. Weitzen won't comment on the EarthLink talks, but says Gateway does plan to expand its business with Internet-service companies. At present, its Gateway.net service relies solely on MCI WorldCom Inc.'s UUnet operation. "We are considering bringing another service provider into the mix," he says. Some analysts believe Gateway is preparing the Street for an acquisition. "If you read between the lines, [CEO Ted] Waitt may be posturing to acquire one of these companies," says U.S. Bancorp Piper Jaffray analyst Ashok Kumar. --------------------------------------------------------------------------------