Gateway, in Restructuring Mode, Posts Operating Profit

Gateway Inc. on Thursday reported an operating profit for the first time in nearly four years, and the computer maker said it would break even or post modest net income by the end of the year as massive restructuring moves take hold.

“Gateway is back on track,” Chief Executive Wayne Inouye told analysts during a conference call. “We’ve taken the first step on a long journey to long-term profitability. Gateway is a company that’s growing again.”

Irvine-based Gateway narrowed its third-quarter net loss to $56.5 million, or 16 cents a share, compared with a loss of $136.1 million, or 43 cents, a year earlier. Revenue rose 3.6% to $915 million.

But excluding $63 million in one-time restructuring charges, Gateway earned 1 cent a share -- its first operating profit in 11 quarters. Wall Street had been expecting an operating loss of 7 cents, according to analysts surveyed by Thomson First Call.

Gateway shares, which rose 15 cents to $5.39 in regular trading on the New York Stock Exchange, surged as high as $6.18 after the earnings report and settled at $6, an 11% gain.

“This is a company in transition,” said Les Santiago, an analyst in San Francisco with Piper Jaffray. “They’ve done a great job of restructuring.”

Since joining Gateway in March, Inouye has closed Gateway’s nationwide network of 188 money-losing retail stores, shuttered other facilities and slashed about 5,400 jobs. He killed most of Gateway’s consumer electronics offerings, including digital cameras, DVD players and video camcorders. (The company introduced a new digital music player Thursday that can display photos like Apple Computer Inc.’s new iPod.)

Inouye, who engineered a turnaround at EMachines Inc. before Gateway bought it, also struck deals to sell PCs through retail outlets including Best Buy Co. and CompUSA Inc. Gateway’s PC sales in the third quarter jumped 67% to 931,000 units.

As a result, Gateway’s gross margin -- the percentage of sales left after production costs, a common yardstick of performance in the technology sector -- was 10.1% in the third quarter, more than matching the company’s goal of achieving margins of 9.5% to 10% by year’s end.

“It gives me some confidence that Gateway is on track and our emphasis on productivity and efficiency is paying off,” Inouye said in a phone interview. “Our goal is to gain traction in retail in the first several months and gain significant share in the retail sector.”

Analysts said they were surprised by how quickly Inouye had pared Gateway’s expenses.

“It indicates the company has returned to health and that they’ll be able to sustain it,” said technology consultant Rob Enderle. “A lot of it was bringing costs in line with revenues. It reflects very well on Inouye.”

Santiago praised Inouye in particular for trimming Gateway’s payroll. The company had about 7,400 employees after the merger but plans to end the year with fewer than 1,900.

“We’re rapidly getting restructuring behind us,” Chief Financial Officer Rod Sherwood said, reiterating Gateway’s goal of achieving net income for 2005.

Analysts are still waiting.

“Gateway’s been promising to return to profitability but kept missing,” Enderle said. “This helps a lot. One quarter is interesting, two quarters is important. But they have to show sustained profit over time.”