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Gateway Reports Profit Amid Struggles

Gateway Reports Profit Amid Struggles

Analysts Conflict on Recovery of Local Computer Company

BY MIKE ALLEN

Senior Staff Writer

Gateway Inc. is facing an uphill battle in its quest to regain market share and regular profitability, analysts said.

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The San Diego-based seller of personal computers said it will slash another 2,250 jobs from its payroll and shut down 19 of its retail stores as part of an abrupt change of strategy to reverse a two-year slide.

After the most recent cuts are completed, Gateway will employ about 12,000 people. In August, before an earlier round of job cuts, it had more than 19,000 workers. The firm will have about 350 employees at its Poway headquarters after 31 jobs are eliminated here. The closings won’t affect the county’s three stores.

In announcing its fourth-quarter profit of $5 million, the company said it intends to get back to profitability by aggressively cutting prices and pumping more money into marketing.

“We’re going to be leading in value at virtually every price point and every product category,” said chairman and CEO Ted Waitt, who owns about 30 percent of the company he founded.

That strategy differs from the company’s earlier “beyond the box” approach to growing the company adopted under former CEO Jeffrey Weitzen, who was let go in early 2001. Through its network of nearly 300 Gateway Country stores, the strategy envisioned increased sales of software, services and training, all of which carry higher profit margins than selling PCs alone.

Waitt said the company still intends to grow these areas, but the focus is now on lowering prices. Many observers doubted the strategy can succeed, given the current economic environment.

“While we believe Gateway has the right strategy in terms of targeting growth, we believe the company needs to find additional ways to lower its cost structure in order to effectively compete longer-term,” said Kimberly Alexy, a stock analyst for Prudential Financial, in her most recent report that advised a hold on the stock.

Bruce Ahern, a local high-tech analyst, was also dubious Gateway would achieve its goal of consistent profitability within a year.

“A pricing-only strategy has never really worked in any environment, but is especially hard today,” Ahern said. “Once you fall into that, it’s almost a death spiral.”

Ahern isn’t saying Gateway will fail, or be gobbled up anytime soon. The fact the company is sitting on more than $1 billion in cash provides it a chance to ride things out.

But not everyone was pessimistic.

Gary Williams, president of local research firm Miller Williams Inc., said Gateway’s extensive retail network gives it an advantage in capturing a segment of buyers he called “socials.”

These customers require a higher degree of handholding before buying a PC, and put a premium on the ability to consult with sellers about their equipment, Williams said.

While this segment makes up about 34 percent of the total market, only 3 percent of the PC buyers say their needs are being met by current sellers, leaving ample opportunity to pick up market share, Williams said.

According to a report by IDC, a Massachusetts-based research firm, No. 1 Dell was the only vendor to gain market share last year, and held 27 percent of the domestic PC market at the end of the fourth quarter.

It was followed by Compaq at 12.7 percent; Hewlett-Packard with 12.2 percent; Gateway at 6.3 percent; and the rest of vendors with 36.2 percent.

For the year, Gateway sold 3.6 million total units in 2001, down 28 percent from the previous year. Despite the small profit in the fourth quarter, for the year Gateway had a net loss of $1 billion, or $3.20 per share, on revenues of $6.1 billion. That compares to 2000 when it had a net profit of $241.5 million, or 75 cents per share, on revenues of $9.6 billion.

Since the earnings announcement Jan. 24, Gateway stock lost more than a fifth of its value, dropping from $6.76 on Jan. 25 to $5.76, and by Jan. 30 to $5.04. Its 52-week range was $22.22 to $4.24.

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