EMachines, Hit Hard by Slump, Fears Continued Losses Ahead

Sluggish demand for personal computers is hurting low-cost personal computer maker EMachines Inc.--and could hurt it for the rest of the year, its president and chief executive said Monday.

Chief Executive Stephen A. Dukker said in an interview with industry analysts that, on top of bad second-quarter news, revenue for the third quarter could fall 15% below analysts’ expectations if consumer buying trends don’t improve.

His comments were made after E-Machines said it will lose 30 cents to 33 cents per share for its fiscal second quarter, ending July 1, on revenue of $115 million to $125 million. The company had revenue of $249.8 million for the first quarter, which ended April 1.

News that the Irvine firm would post a second-quarter loss far greater than the 1-cent-a-share loss Wall Street had expected sent the stock to its lowest point--$2.50 a share--since the company went public at $9 a share in March. The stock recovered a bit to close at $2.61 a share, down $1.08 in Nasdaq trading.

News of the company’s poorer performance comes as signs of weakness are beginning to show in consumer spending, especially for big-ticket items like computers. Housing and manufacturing sectors also are showing some weakness, and the stock market is feeling the pain. From autos and electronics to steel and textiles, stock prices have taken double-digit hits in the past 30 days.

Dukker maintained during the conference call that weak demand for low-end consumer PCs was an industrywide phenomenon, one that began in late April and worsened through May and June.

“I think we’re seeing a fairly classic response to economic uncertainty,” Dukker said, arguing that consumers are canceling big-ticket purchases because they are worried about higher interest rates and volatile stock markets.

Computer sales generally fall into the doldrums at this time of the year, said Anne Bui, a senior analyst at IDC research in Mountain View. For EMachines, the general summer slowdown also is compounded by what she calls a “double-whammy.”

First, the company doesn’t compete in the Asian market, which is still doing well compared with the U.S. market. Second, Bui said, EMachines doesn’t compete in the market for high-end PCs, which is outperforming the market for the inexpensive computers EMachines sells.

“They’re at a twofold disadvantage. It’s mostly them, but the entire industry is having a sluggish quarter,” Bui said. “This is going to spell losses in this second quarter and into the third quarter for them.”

Dukker said deep price discounts to clear out excess inventory created by that weak demand will hurt the company’s gross margins in the third and fourth quarters.

Analysts previously expected EMachines to be profitable in the last half of the year, earning 1 cent a share in the third quarter and 3 cents in the fourth, according to First Call/Thomson Financial.

Though spring and early summer sales are seasonally weak, Dukker said business has been even worse than normal. He said consumer PC demand across the industry could be down 15% in the third quarter compared with a year earlier.

However, he noted that comparisons will be extremely difficult to make because rebates offered by big PC vendors last year resulted in a bumper 1999 third quarter.

In a typical year, PC sales in May are 9% lower than April, Dukker said. This year the drop was 18%. He said the weakness has particularly hurt PCs priced from $600 to $1,000, which is the high end of EMachines’ product lineup, but the low end of PCs by other maker, such as Compaq Computer Corp. and Hewlett-Packard Co.

“We and our competitors must do what it takes to get rid of that excess inventory, and that is basically what is happening now,” Dukker said. The big discounts made by EMachines probably won’t start moving merchandise until July 4, he said.

* Times staff writer Karen Alexander contributed to this report.