Gateway in Black but Cuts Forecast
Computer maker Gateway Inc. on Monday reported its first profit in 3 1/2 years, but its stock plummeted more than 12% after the Irvine-based company cut its full-year revenue and earnings forecast.
Results probably will be weaker than expected in the year’s second half because of lower profit margins caused by Gateway’s strategy of selling its wares in stores instead of directly to consumers and because of the trend of government agencies consolidating computer purchases to one or two vendors, which also leads to lower margins.
In a conference call with analysts Monday after the markets closed, Gateway Chief Financial Officer Rob Sherwood said the company expected a profit of 13 to 15 cents a share for the year ending in December, down from the 17 to 19 cents a share it had previously forecast. Analysts surveyed by Thomson Financial had expected a 2005 profit of 16 cents a share.
Revenue also is likely to come in below previous forecasts: $3.9 billion to $4 billion, down from $4 billion to $4.25 billion, Sherwood said. Analysts’ consensus had been $4.5 billion.
Gateway’s stock, which had gained 8 cents to $3.89 in regular trading Monday, lost 47 cents after hours.
“Our big issue with Gateway remains that while we believe they’re gaining traction in the retail channel, we’re concerned that the second half will get harder for Gateway as HP and Toshiba defend their market share, in particular in the notebook segment in the reseller channel,” said Bill Fearnley, Jr., an analyst with FTN Midwest Securities.
Dell Inc. is the top seller of notebook computers in the country, but Hewlett-Packard Co. and Toshiba Corp. are the top two brands sold in retail stores, followed by Gateway, whose brands include EMachines.
“We expect HP and Toshiba to be very aggressive in pricing and promotion,” Fearnley said.
A big concern for Gateway is that it has been heavily weighted to PCs, about 80% of its business, since it backed down last year from a consumer electronics strategy under which it sold Gateway-branded television sets, digital and video cameras and MP3 music players.
“The sooner they get into non-PC products the better,” Fearnley said.
“But they’re at a competitive disadvantage to other players like HP and Dell, which already have more rounded-out offerings.”
HP’s printer, server and storage business and Dell’s portfolio of printers, software and peripherals and storage products help “ease the pressure that everyone feels, and Gateway has some catching up to do,” Fearnley said.
Strong laptop sales helped boost second-quarter earnings to $17.2 million, or 5 cents a share, contrasted with a loss of $339 million, or 91 cents, a year earlier. Revenue increased 4.2% to $873 million.
The second-quarter results included a $15-million gain, the first installment of a four-year, $150-million payout from Microsoft Corp. to settle antitrust allegations brought by Gateway.
Gateway said most of the Microsoft money would be spent on marketing and product testing.
Gateway had twice delayed the announcement of second-quarter results while it consulted with advisors and the Securities and Exchange Commission as to how to book the settlement.
