April 29, 2004 5:10 PM PDT

Gateway reports loss, announces layoffs

Gateway on Thursday reported a larger-than-expected first-quarter loss due to restructuring charges, and it announced plans to lay off 1,500 more employees by the end of the year, reducing its number of people to about 2,000.

The news of the layoffs came as the PC maker, which acquired manufacturer eMachines in March in an effort to boost PC shipments, reported a preliminary loss of $166 million, 49 cents per share, on revenue of $868 million for the first quarter, which ended March 31.

The loss included a charge of $104 million, or 31 cents per share, related to the closing of its chain of 188 retail outlets, which resulted in 2,500 layoffs. Without the charge and a $13 million tax benefit, Gateway would have posted a $75 million loss--22 cents per share--for the quarter, the company said.

On average, 10 analysts surveyed by Thomson First Call had expected Gateway to report a loss of 20 cents per share. Revenue estimates of eight analysts polled by the firm averaged $795 million.

During the same quarter one year ago, Gateway reported a $200 million loss, equaling 62 cents per share, on revenue of $844 million.

Gateway said the preliminary results incorporated revenue from eMachines, starting on March 12. (The results are subject to change pending the resolution of several matters, including a settlement with an unnamed partner.) That inclusion helped push unit shipments of Gateway PCs up 19 percent year over year, to 604,000 during the quarter.

Keep it simple
Gateway revealed some plans for the future on Thursday. Until now, the post-acquisition company has focused on simplifying its operations: streamlining its PC product lines, for example. It expects to launch new models over the summer.

The PC maker has also been working to establish a presence among third-party retailers, through which it aims to sell Gateway and eMachines PCs, and Gateway-brand consumer electronics gear. While the recently closed Gateway stores were expensive to run, they generated about $300 million in quarterly revenue, which the company aims to replace with third-party business.

Gateway is seeking to sign deals with stores such as Best Buy and Circuit City, its new chief executive, Wayne Inouye, indicated during a conference call to discuss earnings. Inouye, who had been eMachines' CEO, took the helm at Gateway on March 11, the day the acquisition closed. Ted Waitt, Gateway's former CEO, continues as chairman.

"We're having strategic discussions with our focused...retail partners," Inouye said. "I can't comment on when we'll see product in the channel. Certainly our target is to have products in the channel by back to school. We've been very encouraged by our discussions with our potential retail partners. We believe Gateway will have a strong channel presence at least by the fourth quarter."

Gateway will continue to position its eMachines-brand PCs as low-price PCs, while offering Gateway-brand PCs as premium machines. It plans to market Gateway CE-brand consumer electronics gear as alternatives to low-price brands from lesser-known makers.

At the same time, the company plans to continue selling Gateway-brand computers directly to business, government and education customers. It's expected to introduce two low-cost business servers in early May, for example. It's likely to simplify its business product line somewhat, as well.

As previously reported, Gateway's cost-cutting layoffs will chop its current staff of 3,500 nearly in half.

The company's number of workers, which was at roughly 7,500 at the end of last year, has been falling continuously. After the store closings in early April, its roster was at about 4,000. But the total has fallen even more since then, as a result of previously announced restructuring and outsourcing initiatives, according to a company representative.

Gateway will use the layoffs and other cost-reduction efforts, such as the streamlining of product lines, to speed its push to profitability. It plans to return to the black by 2005, it said in its earnings statement.

As part of the cost-cutting push, Gateway will try to lower selling, general and administrative costs (mainly salaries) to less than 10 percent of revenue--which would bring it in line with rivals such as Dell. Gateway's selling, general and administrative costs have traditionally been much higher; they accounted for more than 20 percent of revenue during the fourth quarter of 2003, for example.

Although the layoffs and cost-cutting efforts will take time and money to enact, Gateway expects to take charges of between $400 million and $450 million over the next few quarters. That's in addition to $25 million of costs associated with prior actions, the company said in its earnings statement.

Gateway said it expects second-quarter revenue of $798 million and a loss of 15 cents per share before charges.

 

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