New Gateway CEO Lays Out Growth Plan
Gateway Inc.’s new chief executive introduced himself to Wall Street on Monday by outlining plans to restore profit at the money-losing computer maker and rebuild confidence in the company’s brand.
Wayne Inouye told analysts in New York that Gateway’s overhead costs would drop over the next several years below those of rival Dell Inc., famous for its ultra-lean cost structure. He said Gateway would significantly reduce warranty costs, increase revenue from international customers and move the company’s technical-support call centers back to the U.S. from India.
“Our goal is revenue of $5 million per employee,” said Inouye, who earned a reputation for frugality and efficiency as CEO of EMachines Inc., which Gateway purchased in March.
Based on Gateway’s target headcount of about 1,900, that would mean annual revenue of $9.5 billion. This year, the Irvine company has said, it expects revenue of about $4 billion.
Gateway, which has posted losses for the last 15 quarters, could break even or register a profit on an operating basis in the fourth quarter, Chief Financial Officer Rod Sherwood told the analysts. But he said that in the current quarter, the company expected to post a loss of 22 cents to 24 cents on revenue of $900 million to $950 million.
Analysts who have heard Gateway executives promise profit for years seemed willing to take “a ‘show-me’ stance,” as Steven Fortuna of Prudential Equity Group in Boston put it. Inouye already has taken steps, closing the company’s network of 188 retail stores and slashing about 5,500 jobs.
Still, Fortuna wrote in an investment note to clients after the presentation that Gateway “faces a number of challenges which include gaining traction in retail, overcoming scale issues relative to competition, and a diminished brand.”
Gateway is still “kind of a weak competitor in the sector, and this is an industry that punishes weak competitors to the extent they may have to leave the market,” said Bruce Raabe, chief investment officer of Collins & Co. in San Francisco. “But that’s not to say Gateway can’t reinvent itself.”
On Monday, Gateway shares slipped 12 cents to $4.70 on the New York Stock Exchange. Their fall was precipitated by reports suggesting that Gateway would leave the consumer electronics business, said Michelle Lin Gutierrez, an analyst in San Francisco with Schwab SoundView Capital Markets.
Although Gateway has stopped selling items such as video cameras and digital music players, it will continue offering television sets and monitors, Inouye said.
“It’s not true that we’re exiting consumer electronics,” he said. “We’re just focusing on our core business.”
Inouye pledged to burnish the image of both the entry-level EMachines brand and the premium Gateway brand. He said they would become the computer world’s equivalent of Toyota and Lexus, which consistently score high marks for reliability and value. To that end, he said Gateway would bring its tech-support phone service back to the U.S. from India to boost customer satisfaction.
“You’re better off in tech support using as many local parts as possible,” Inouye said. “There are many local nuances you just can’t address out of the country.”
Gateway’s list of retail partners -- which include Best Buy Co., CompUSA Inc., Office Depot Inc. and Costco Wholesale Corp. -- will continue to grow and include more retailers overseas, he said.
While boosting revenue, Inouye said he would cut overhead costs from the 22% to 23% of the “old Gateway” to about 9% by the end of this year. Costs will come down further to between 6% and 7% in “the future Gateway,” he said, which “puts us well below the market leader you write about all the time: Dell.”
By selling almost exclusively over the phone and the Internet, Dell says it maintains overhead costs of around 9%.
