Gateway to Exit Asia, Cut Up to 5,000 Jobs

Gateway Inc. said Tuesday that it will pull out of Asia and probably Europe, slashing as many as 5,000 jobs, or 25% of its workers, in a drastic bid to emerge from the computer-industry slump as a leaner and more profitable company.

The nation’s fourth-largest computer maker will redouble its efforts to sell services, software and Internet access along with the profit-challenged PCs in its trademark cow-patterned boxes.

“I’m convinced that these are the right decisions for the long-term success of this company,” founder and Chief Executive Ted Waitt said on a conference call with investors and analysts.

Yet even those steps may not be enough, analysts said, as the industry continues to slump and companies desperately look for ways to distinguish their products.

Gateway’s sharp retreat had been under consideration for months as U.S. computer shipments remain on pace for their first year-to-year decline.

San Diego-based Gateway is in a fierce price war with Dell Computer Corp., the other major seller of machines directly to consumers, and its expenses are higher than Dell’s in part because of its 296 retail stores. Gateway, Dell, Compaq Computer Corp. and Hewlett-Packard Co. shed staff this year.

“It’s certainly a dramatic retrenching,” said analyst Eric Rothdeutsch of Robertson Stephens. “The jury’s going to be out for at least a few quarters.”

Gateway shares rose 10 cents, to $8.60 in regular New York Stock Exchange trading before the news was announced, then jumped in after-hours trading to $9.19. The shares have fallen 50% this year. In the U.S., Gateway will shut its Salt Lake City factory and customer-service call centers in Lake Forest in Orange County; Utah; Virginia; and one of its three centers in South Dakota. Five call centers and other factories will survive.

Gateway also will close a factory in Malaysia and other operations in Singapore, Japan, Australia and New Zealand. In a month, the company will decide whether to go ahead with a proposal to end its European efforts, including a factory in Ireland.

Gateway expects to take a charge of $475 million for the third quarter.

Gateway executives stuck by earlier predictions that the company will turn a profit in the fourth quarter and the second half of this year, with the number of computers shipped increasing in each of the next two quarters.

They said the company will have $1 billion in cash and investments at year-end and continue to be profitable in the first half of 2002.

Gateway had $9.6 billion in revenue last year, but posted losses in each of the first two quarters of this year. The forecast for second-half profit excludes taxes as well as some expenses.

Last week, Standard & Poor’s cut its debt rating on the company to junk status.

Analysts said Gateway would do better without the international operations.

“They did not have any traction there,” said analyst Ashok Kumar of U.S. Bancorp Piper Jaffray. Overseas sales amounted to just 15% of the company’s total revenue.

As dramatic as Tuesday’s steps were, some said they probably won’t be enough to turn the company around.

Each Gateway store has an overhead of $1 million annually, so Waitt’s plan to use each facility for face-to-face sales and services will have to generate an astonishing amount of revenue, Kumar said. Costs have risen much faster than sales in the last five years, and “you can’t cost-cut your way to profitability,” Kumar said. “They are essentially giving away a hundred-dollar bill on each PC sold.”

Waitt and Chief Financial Officer Joe Burke said the company will reorganize into six groups: hardware, communications, applications, training, services and financing.

All but hardware, the biggest segment, have $100 million to $200 million in annual sales, high gross profit margins and faster growth, they said.

The executives said Gateway will use mail, phone calls and other direct sales pitches instead of relying on advertising to bring more customers into the company’s stores.

Non-PC revenue is about 17% of Gateway’s sales but 40% of gross profit.

The challenge is to keep “coming up with more compelling or more robust or more better solutions, products and services that people really think are important,” Burke said.

“There’s no question it’s tough in the marketplace,” Burke said. “We’re recognizing where we have weaknesses. We’re trying to become more efficient operationally. We’re not trying to serve every customer group in the world--just consumers [in the] U.S., small and medium businesses.

“We’ve got enough financial wherewithal to weather this period.”

Analysts said the PC industry is ripe for consolidation, but they said Gateway would have few assets worth acquiring.

Asked what he would do if he were Waitt, Kumar said he would “put the $1 billion in a money market fund and get out of the business.”

“There was so much misalignment that I don’t think one strike of the pen is going to rectify it,” he said.