Gateway CEO Departure Suggests Renewed Commercial Push

By John G. Spooner  |  Posted 2006-02-09

Gateway CEO Departure Suggests Renewed Commercial Push

PC maker Gateway, which has roots in direct sales as well as government and education, made a major foray into the retail market following its 2004 eMachines acquisition.

Now, as it searches for a new CEO, its aiming to boost its direct sales, as well as its presence in segments such as SMB (small and midsize business), government and education, according to Rick Snyder, the companys chairman and interim CEO.

Gateway announced former CEO Wayne Inouyes resignation Feb. 9, and said a search for his successor will start immediately.

Gateway, based in Irvine, Calif., appears to be looking for a different kind of executive to tackle the job, going forward.

Inouye, the former CEO of eMachines who replaced Gateway founder Ted Waitt at the helm, is credited with righting Gateway financially after a long string of quarterly financial losses, creating its new retail strategy and knitting together its integration with eMachines.

Despite the companys saying that no major changes are on the horizon—outside of fine-tuning products and services for professional and consumer direct markets—Gateway appears to be looking to find a new personality, someone who fits with the companys style, Snyder said.

"Well be looking for someone who can do a continuation [of the current strategy], but its a living thing," Snyder said in a conference call with analysts and reporters. "I dont want to handcuff the CEO one way or the other. But I dont anticipate major change."

Snyder didnt elaborate on exactly what kind of style the company has adopted of late. However, he said the board does have in mind reviving some of the old Gateway, which once positioned itself to customers as a friend in the business.

"We were viewed as a unique player that had special attributes. So the question is, can we bring some of that sparkle back?" Snyder said.

Among Gateways areas of special emphasis were education, state and local government, and SMBs, generally served by its direct business. Its direct sales have fallen over the last few quarters, however.

Gateways Professional segment sales totaled $217 million during the fourth quarter of 2005, and the segments PC units were 167,000, equaling a revenue decline of 24 percent sequentially and 9 percent year over year, and a unit shipment decrease of 26 percent sequentially and 3 percent year over year. Its fourth quarter direct sales yielded revenue of $115 million and PC units of 58,000, both sequential and year-over-year declines as well, the company said.

"Those are all areas I think we can look at," Snyder said.

Click here to read more about Gateways approach to the SMB market.

Thats not to say Gateway wont also continue forward with its current retail strategy, Snyder said. However, he said, the company believes it can have a better mix of both, despite intense competition from its larger rivals, including Dell, Hewlett-Packard and Lenovo Group. Meanwhile, Apple Computer, a long-time competitor in areas such as education, has also been enjoying a resurgence of late.

"Im not willing to concede that we cant find a good niche for us and become a player," Snyder said.

Gateway intends to stay focused on PCs and will not attempt a return to consumer electronics, for example, the chairman said.

The departure of Inouye, who stepped down on Wednesday to pursue other opportunities, came as something of a surprise. However, it marked the return of Snyder as its interim chief. Snyder, who joined Gateway as its executive vice president and director in 1991 and with Waitt led its IPO (initial public offering), was president and chief operating officer when he left the company in August 1997. He later returned as chairman.

Snyder, now CEO of venture capital company Ardesta, based in Ann Arbor, Mich., deflected questions about his own interest in taking over as permanent CEO of Gateway, saying his family was still in Michigan and that any decision would have to be made with them.

Inouyes resignation came just days after the company reported its GAAP (Generally Accepted Accounting Principles) profit since 2000. For the fourth quarter of 2005, the company turned a $224 million profit on $1.2 billion in sales.

Next Page: Gateways turnaround under Inouye.

Gateways Turnaround Under Inouye

Gateway bought eMachines for about $289 million in March 2004 in what analysts termed a reverse acquisition.

The move made Gateway the third-largest PC maker in the United States, and Inouye quickly started putting his mark on the company, which had struggled during the previous few years under Waitts direction.

Gateway may have bought eMachines, but Inouye almost immediately began making moves to bolster the company.

As part of that turnaround, Inouye pared down Gateways work force to fewer than 2,000, moved the company headquarters from suburban San Diego to eMachines hometown of Irvine, Calif., installed many eMachines executives in top positions and closed down Gateways 190 retail stores.

In their place, Inouye pursued a retail strategy, getting shelf space for the companys PCs at big-name stores such as Best Buy, OfficeMax and Circuit City.

There, it marketed its eMachines and Gateway-brand PCs as value and premium machines, respectively.

Inouye also reorganized Gateways manufacturing, placing its two brands of PCs onto platforms that could share components and using third-party assemblers, as opposed to building the machines in-house. The measures were designed to get Gateways cost structure in order, and resulted in the company returning to profitability in 2005.

Despite that success, Gateway has still struggled in some areas of the ultra-competitive PC market. Inouye himself said Gateways direct-sales business was disappointing and the company was not doing a good enough job of managing its profit margins following its fourth-quarter earnings report. Gateway, he said, is still in the midst of a post-eMachines turnaround.

Click here to read more about Inouyes thoughts on Gateways path to success.

Thus, Gateways new management will have its work cut out for it, analysts said, particularly as it indicated it has no immediate plans to sell to a competitor.

Gateway management must guide its brand carefully, going forward, said Roger Kay, principal analyst at Endpoint Technologies Associates in Wayland, Mass.

"During Waynes tenure, the company stuck to one strategy, which was a break from the previous [leadership under Waitt]," Kay said. "Gateway had shifted strategy so many times, none of them was credible. He gets credit for staying the course and giving Gateway a more solid brand image."

Inouye did a good job of improving the operations of the company and tightening the budget, but was unable to make the next step happen that the company needed, according to Kay. "There was steady improvement, but it was pretty slow improvement," he said.

One major issue for Gateway has been its position versus competitors. It doesnt have the size or reach of larger rivals such as HP, its main competitor at retail, or Dell, a direct sales rival thats also strong in government and education accounts.

It must also contend with up-and-comers such as Acer and Lenovo Group, which has placed major emphasis on targeting SMBs following its purchase of IBMs PC business.

Gateway must rise above the din and get people to look its way, something it wasnt able to do under Inouye, Kay said. Despite a deep knowledge of operational strategy and retail business, "what [Inouye] seemed to lack was the necessary imagination to get them to the next level." The former Gateway chief will server as an advisor until a permanent replacement can be found. He will be given a years salary—about $720,000—and three years worth of health benefits, the company said.

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