Slowing PC Sales Sink Gateway Shares

A combination of analyst downgrades, reports of declining PC sales and a less-than-stellar second-quarter earnings report conspired to briefly send Gateway Inc. shares to close at its 52-week low of $9.93 on July 30.

Analysts downgraded the PC maker's stock after a report noted that worldwide PC sales were declining and the computer maker reported lower revenue for the second quarter.

Gateway reported a pre-tax loss of $9 million, or 2 cents per share, for the quarter, compared with a loss of $6 million, or 1 cent per share, in the first quarter. The company said its revenue in the second quarter was $1.5 billion. Gateway's net loss for the quarter was $20.8 million, or 6 cents per share.

According to Gateway's founder, chairman/CEO Ted Waitt, the computer industry is undergoing a fundamental change.

“It's no longer technology for technology's sake,” he said. “It's about how technology can improve people's lives and businesses.”

According to research firm Gartner Dataquest, worldwide shipments of personal computers totaled 30.4 million in the second quarter, down 1.9 percent from a year earlier. It was the second consecutive quarter of negative growth in domestic PC sales.

Unit sales of Gateway computers were down 21 percent in the second quarter, to 923,000, the company noted. However, unit sales to small and midsize businesses grew 27 percent compared with last year. Education segment sales were up 11 percent in the second quarter.

The Gartner Dataquest report found that Dell, with a 13 percent market share, was the only major computer maker to have positive growth rates in both the worldwide and domestic sectors. Gateway's declining sales dropped it from among the top five PC vendors.

Gateway's Waitt said in a letter to shareholders that the company was surprised by the severity of the economic downturn in the fourth quarter of 2000.

“Despite the fact that we called the downturn early, we frankly were caught off-guard by its severity,” he said. “Our costs had grown too high for a business caught in an economic downdraft while trying to shift from low-margin PCs to high-margin services.”

The company expects to take a pre-tax charge of $25 million to $30 million in the third quarter related to its restructuring efforts, which include transforming its business from a traditional manufacturer of PCs to a provider of personalized technology. Gateway formed a Solutions Group to focus on integrating hardware, software and services.

Vadim Zlotnikov, an analyst at Sanford C. Bernstein, said Gateway receives about 85 percent of its revenue from domestic sales of PCs.

“Gateway has yet to successfully leverage its brand identity outside of the United States,” he said.

The analyst noted that Gateway's retail stores, known as Gateway Country, have added to the company's growing operating expenses. Since 1996, when it opened its first Gateway Country store, the PC maker's operating expenses have grown 26 percent a year compared with revenue growth of 17 percent.

“The challenge that Gateway faces is twofold: growing revenues in a withering consumer PC market and trimming its cost structure to compete in a commoditized market,” Zlotnikov said.

The analyst noted, however, that the Gateway Country stores were responsible for 75 percent of the company's revenue growth in 2000.

Gateway's shares are down 12 percent year-to-date, the analysts said.

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