January 11, 2001 3:10 PM PST

Gateway to cut 3,000 jobs amid poor earnings

Amid a rapidly deteriorating PC market, Gateway on Thursday reported fourth-quarter earnings below even lowered expectations, again slashed its 2001 forecast, and said it will cut at least 3,000 jobs--more than 10 percent of its work force.

Gateway lost $94.3 million, or 29 cents per share, including a previously announced $187 million charge, on sales of $2.37 billion. Excluding the charge, Gateway would have earned $37.6 million, or 12 cents per share.

Analysts had been expecting Gateway to earn 37 cents per share, excluding charges, on revenue of $2.64 billion.

In regular trading Gateway shares gained $2.96 to close at $22.90. In after-hours trading, the shares slipped to about $20.

In the fourth quarter of 1999, Gateway reported a profit of $126 million, or 38 cents per share, on revenue of $2.55 billion.

Gateway had not been expected to report earnings until next week.

Gateway's shortfall comes the same day that Hewlett-Packard issued a more modest earnings warning. HP said after the close of regular trading that earnings for the quarter ending Jan. 31 will be 35 cents to 40 cents a share, compared with previous estimates of 42 cents.

Gateway Chief Financial Officer John Todd said in a conference call that much of the shortfall came from even weaker-than-expected consumer sales, which also led to the lower operating earnings.

"When you plan for $3 billion in revenue and you (do) $2.3 billion, you?re going to have a cost problem," Todd said.

The job reductions will be a combination of layoffs and the elimination of open positions throughout Gateway's 24,000-person worldwide work force, spokesman John Spelich said.

Gateway said it will look to lower prices to boost its market share, but Todd said the move will result in lower profit margins. To make up some of the lost margin, Gateway is looking to lower the cost of making its computers by cutting 1,300 jobs in procurement, technical support and manufacturing.

"We'll be more competitive on price immediately," Todd said.

Gateway said it saw its pricing fall 10 percent from the November earnings warning to the end of the quarter. Even at that, Weitzen said Gateway was not as aggressive as its competitors.

"We were clearly not the price leaders over the last four or five weeks," Weitzen said in the conference call. "We plan on getting much more aggressive."

Analysts said they expected bad news from Gateway, but not this bad.

"The extent of this announcement comes as somewhat of a surprise, but Gateway's PC unit shipments have been relatively flat for the last year," said Technology Business Research analyst Brooks Gray. "What concerns me is that Gateway is recognizing substantial investment losses. The company does not have the cash position to be in the investment game.

"It's good to see Gateway management taking decisive action with the work force reduction, although a higher level of foresight would've been better for all parties involved."

On Nov. 29, Gateway warned that its earnings would be around 37 cents per share--25 cents lower than prior forecasts--because of weakening PC sales.

Weitzen acknowledged that the company took a risk by preannouncing so early in the quarter, with only limited data.

"What we didn't know at the time is that demand would not only not improve but it would get materially worse," Weitzen said.

On Thursday, Gateway predicted continued hard times over the next six months amid a weak economy and a glut of unsold computers.

"It's hard to see the pricing easing when there is this much inventory in the channel," Weitzen said. While he did not give his estimate of how many weeks' worth of computers are in stores, he noted that there is "a lot of inventory rotting on the shelves."

"When we preannounced on Nov. 29, we had expected some continued ramping of demand in December based on past experience, but that did not materialize," Weitzen said. "Softer sales have caused inventories of our competitors to swell and have touched off an aggressive pricing environment that will have negative consequences for the PC sector for the next six months."

Gateway said it is taking a $50 million pretax charge in the first quarter to account for the work force reductions.

In its November warning, Gateway said it expected 2001 per-share earnings to be around $1.89, down from a prior estimate of $2.28.

On Thursday, the company again lowered its expectations for this year. It now expects its per-share earnings, before charges, to be $1.44--or 6 percent above last year's $1.36.

Gateway also said its revenue for 2001 will grow 3 percent over last year.

In making the new forecast, Gateway said it sees a "continuation of the present economic environment through the first half" but expects improvement in the second half of the year.

 

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