Waitt Feeling the Pressure

Gateway continues financial losing streak; critics blame founder for company's strategic missteps

After ousting Gateway Inc.s management team in January amid slumping sales, founder Ted Waitt retook the helm of his troubled PC company and vowed to steer it back to profitability.

Six months later, his efforts have yet to stop the hemorrhaging, with the nations fifth-largest PC company reporting earnings this month well below Wall Streets expectations and marking its third consecutive quarterly loss. Perhaps even more troubling has been the erosion of confidence in Waitts leadership.

Overall, San Diego-based Gateways heavy reliance on consumer sales left it particularly vulnerable to the current industry slump, leaving it with fewer options to weather the storm than other top-tier PC makers.

Although it has strived to boost its enterprise business, where sales are generally more lucrative because they often bring in additional support and services revenue, Gateways efforts have met with little success. Even the companys recent "Gateway Guarantee," in which it offers to match any competitors price, wont attract companies, said one systems manager.

"You might save a few dollars upfront, but you more than pay those back dealing with some of the issues that come up, such as system compatibility, support and servicing," said Marshall Fernholz, procurement manager of the American Medical Association, in Chicago.

Critics contend the meet-any-price campaign backfired and cost the company millions of dollars in revenue, with Waitt acknowledging in a conference call this month that it "failed to raise the tide" and will be phased out in the coming weeks.

"You saw $500 million in revenues evaporate this quarter," said Eric Rothdeutsch, a market analyst with Robertson Stevens Inc., in New York. "This is the success of the Gateway Guarantee."

Waitt has yet to figure out how to navigate Gateway back to profitability, Rothdeutsch said. "Six months after the management shake-up, they still do not have a plan for getting out of their predicament," he said.

Waitts apparent about-face on the companys "beyond-the-box" strategy has also come under attack. In February, he criticized his previous management team for overemphasizing non-PC sales—software and digital hardware such as cameras—and promised to take a back-to-basics approach and focus on PC sales.

But this month, Waitt changed his mind.

"Its very clear to me that the industry is now going through a fundamental and permanent change," Waitt told analysts during an earnings call July 19. "Its not merely a price thing."

In response, he said Gateway will focus on offering bundled solutions of hardware, software and services—essentially the beyond-the-box strategy.

"Hes revived it because hes got nowhere else to go," Rothdeutsch said.

Other industry analysts agreed.

"I thought that had been their focus for years now," said Rob Cihra, market analyst with ABN Amro Inc., in New York. "Im not sure what the new strategy is."

Waitts flip-flopping on that issue, the costly price guarantee and a vague proposal this month of plans to form a solutions group have apparently undermined investor confidence; the companys stock fell 30 percent this month to a 52-week low of $9.45 a share.

"If anything, I think theyre in worse shape now than they were six months ago," Cihra said.