Gateway Vows to Win PC Price War, Revive Profit

Gateway Inc. took the offensive in the personal computer price war Wednesday, promising to undercut its major rivals in an effort to revive profit and reverse a slide in market share.

The San Diego-based company has been on a mission to cut its operating costs and focus on moving computers, rather than making its profit from peripherals, since founder Ted Waitt returned to the helm as chief executive and promised in February to return the firm to profitability this year.

“From our perspective, there’s been a price war in the PC industry since we opened for business in 1985 . . . so we’re veterans of this. In fact, we love it,” Waitt said.

Gateway said it would beat prices for any computer with at least an 800-megahertz system. Gateway’s current price for an 800 MHz system is $799.

Gateway is steering itself to return to an operating profit in the second half of the year after breaking even in the first half, consistent with its forecast made in February.

But the discounts could erode the gross profit margin percentage, which is sales minus cost of sales as a percent of revenue, even as unit sales rise.

Waitt said that Gateway expected to meet its earnings forecast, despite the possible decline in gross profit margin, by selling more computers as a result of the new pricing offer.

Gateway promised in February to cut costs and take some short-term pains to do so. It took $533 million in one-time charges in the first quarter. Still, the company’s U.S. market share was 8.7% in the first quarter, down from 9.0% a year earlier, according to International Data Corp.

Waitt said Gateway expected to see an incremental increase in market share as a result of the pricing offer. According to the results in two test markets, consumer consideration of Gateway PCs dramatically increased, Waitt said.

Gateway shares closed off 73 cents, or 4.18%, at $16.74 on the New York Stock Exchange. The stock has recovered from its 52-week low of $14.27 from early April, but is still off about 3% since the start of the year.