EMachines Issues 4th-Quarter Warning
Bargain computer seller EMachines Inc. warned Wednesday that an industrywide sales slump has dealt a severe blow to its holiday season results.
The Irvine company said it would lose about five times as much money as analysts had predicted for the fourth quarter--19 cents to 23 cents a share, compared with a consensus estimate of 4 cents.
The company expects revenue of $120 million to $130 million, a precipitous 58% drop from the $307 million it recorded in last year’s robust final three months.
Its battered shares declined by 23% on the news, losing 9 cents to close at 31 cents in Nasdaq trading. The stock has lost 97% of its value since the company went public in March.
Company officials blamed declining consumer demand, a weakening economy and a glut of inventory, the same factors dragging down its competitors. Compaq Computer Corp., Gateway Inc. and Apple Computer Inc. have issued similarly dire earnings warnings.
But for EMachines, which came from nowhere in late 1998 to emerge as the third largest seller of desktop computers, the slowdown could have a more devastating effect.
The company has relied almost solely upon the low end of the computer market, selling models for as little as $399.
Even when it was riding high during last year’s huge market expansion, it took home just 5 cents for every dollar of sales, compared with about 25 cents for its chief competitors.
But now that its big-name rivals are discounting like mad to move merchandise, that narrow franchise is threatened, said Anne Bui, an analyst for IDC.
“They are particularly vulnerable to what’s happening,” she said. “EMachines is singing to the wrong crowd.”
EMachines also faces a host of other obstacles, analysts said:
* It markets its products almost entirely to consumers--the weakest part of the market--and not to businesses.
* Its limited product line offers little to pick up the slack for desktop PCs, even though it recently introduced notebooks and an Internet appliance.
* Sales in Western Europe are as sluggish as in the U.S., though it got a short-term sales boost last quarter when it entered the United Kingdom market.
EMachines plans to start a direct-selling program early next year, moving into the higher-margin area of financing, but its attempt to generate revenue from Internet advertising and services has not made much impact.
The company ended the third quarter with about $200 million in cash and Chief Executive Stephen Dukker has said it faces no immediate threat. But with computer sales expected to remain weak through the first half of next year, the company can expect little relief.
“It would seem they have really tough times ahead,” said Joe To, an analyst for Lehman Bros.
