May 8, 2003 5:08 PM PDT

Gateway unfolds PC-to-electronics plan

Gateway plans to return to profitability by quickly evolving from a PC builder to a brand-name purveyor of many things electronic.

Executives at Gateway's annual financial analyst meeting in San Diego said Thursday that the company intends to revamp its retail stores and launch a broad range of new products for businesses and consumers. The list of products includes computers, PDAs (personal digital assistants), networking gear and services, home-theater equipment--and even furniture.

"In 2003, we have two major goals for the business. One is to transform the company very rapidly from a PC company to what we're calling a branded integrator. Number two is to get profitable and stay that way," said Ted Waitt, Gateway's CEO, at the meeting.

The "branded integrator" plan involves selling a wide range of products and services that work together, all under one brand name.

If it works, the strategy should boost sales and profit margins, which will help the Poway, Calif.-based company return to profitability after a string of quarterly losses, executives said.

But Gateway, which was once one of the fastest-growing PC makers, has been struggling to reinvent itself for some time. This new product rollout--which promises 50 new products in 15 categories--is just the latest in a series of new strategies the company has outlined since Waitt returned as CEO in January 2001. Gateway has continued to lose money since then, despite slashing staff, pulling back from overseas markets and closing store locations.

Claiming that this time around will be different, Gateway will kick off its latest plan by launching several types of products, including PCs, digital televisions, home-theater equipment--such as rear-projection TVs--and home-networking equipment. It will also sell furniture and accessories for the home theater, Waitt said.

Gateway will launch a total of 28 software, computer peripheral and computer accessory products for the home, as well as a host of new business products, including a four-processor server and a line of external data storage equipment, he said.

Gateway demonstrated some candidates for its 50 new products during the meeting. Among those shown were a home theater in a box; several LCD TVs with screen sizes such as 18-inches and 23-inches; a DVD player that can connect to a home network; several computing accessories, such as a USB storage device; and a large-screen notebook, designed for multimedia.

While only for demonstration purposes, most of the products shown will be introduced in some form by the company, executives indicated.

Building the hub
Gateway plans to make its retail stores the hub of its branding strategy. With an eye on making its stores more profitable, the company will redesign about 100 of the 192 outlets. The first five stores will be remodeled during the third quarter. The redesign includes providing more customer service and changing the layout to create a more comfortable setting.

Each of the revamped stores will include a small business section, where the company will display products such as servers and storage systems.

Although a large part of Gateway's efforts will focus on consumer devices such as televisions, the company also wishes to boost its sales to businesses. There, it will introduce several more new products and services. It will also enter into an alliance.

Aside from the four-processor server mentioned by Waitt, Gateway is also working on network attached storage (NAS) products and exploring building a new server based on Intel's 64-bit Itanium processor. Gateway is also developing an "ultrasmall" desktop PC, Waitt said, for businesses where space is at a premium.

Gateway will beef up its service program for businesses as well, by launching a new two-hour response time support program and making the Linux operating system a standard offering in the future. Right now, customers must pay Gateway an extra fee to have the OS custom installed.

Gateway executives also said the company has inked a deal with distributor CDW, which will market three Gateway desktops and one Gateway notebook.

Also among the future business products demonstrated by the company were a PDA model that will most likely be based on Microsoft's Pocket PC software, a "convertible" tablet PC and a notebook with a 17-inch display and integrated numeric keyboard. A convertible notebook has a screen that opens, then rotates 180 degrees and folds back down to create a slatelike writing surface.

Because the company is trying to curb financial losses, it will bring the new products to market quickly, Waitt said.

Gateway is also working to lower its quarterly break-even point by cutting expenses and reducing costs associated with manufacturing.

The company began putting this aspect of its revitalization plan into place during the first few weeks of this year. Since then, Gateway has cut its work force by about 1,900 employees and closed 80 of its retail stores. The company's most recent layoffs came this week, when it dismissed 43 part-time employees working in its tech support department.

Gateway forecasts a return to profitability by the fourth quarter of this year.

Toward the end of the day, Gateway CFO Rod Sherwood noted that the company remains comfortable with analysts' consensus estimates for the remainder of the year, which call for Gateway to post per-share losses of 27 cents for the current quarter, 19 cents for the third quarter and 9 cents for the fourth quarter. The company reiterated plans to shave $200 million in sales and administration costs and $200 million in manufacturing costs by the end of the year.

Asked whether the company is seeing any pickup in demand that accounts for its confidence, Waitt said, "I wouldn't say there is any improvement in demand. It is internal execution."

News.com's Ian Fried contributed to this story.

 

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