Gateway Still Looking for Profitability

Despite a $73 million loss in Q2, Gateway says its effort to sell more non-PC products is paying off.

Gateway Inc. lost $73 million on revenues of $800 million in the second quarter, but company officials on Thursday reaffirmed plans to reach profitability by the end of the year.

The $73 million loss for the three months that ended June 30 was greater than the $61 million the Poway, Calif., companys loss during the same period last year. But it was less than the $200 million lost in the first quarter. Revenue also dropped—from $1 billion in the second quarter of 2002—but remained relatively stable compared with the $844 million it garnered during the first quarter of 2003.

In a prepared statement released with the financial numbers on Thursday, Chairman and CEO Ted Waitt said the company, long known for its PC business, was making progress in its push to expand beyond the desktop business and into other areas, including servers, storage and other consumer products.

"We have a lot of work to do, but every step in our transformation is being taken from a position of increased strength and momentum, and we expect to keep delivering on our milestones and goals through the balance of the year and beyond," Waitt said.

Part of that transformation can be seen in the amount of revenue coming in from parts of the business outside of PCs. According to Gateway, 28 percent of all revenue during the quarter came from non-PC products, as opposed to 24 percent in the first quarter. The company during the second quarter sold 490,000 desktops, a 3 percent drop from the same period last year, due in part to store closings announced in the first quarter.

Still, Gateway said it is not abandoning its past. The company on Friday will open the first of its renovated retail stores in San Diego, with four more pilot stores opening over the next few weeks. The stores are being remodeled to showcase not only the PCs but everything else, from plasma TVs to servers, that the company manufactures. In addition, Waitt said he expects to have all the stores remodeled by Sept. 30, in time for the start of the holiday buying season.

Officials also said they plan to roll out a new line of low-end desktops over the next few weeks that it will sell in addition to its consumer 300 Series. During a conference call with analysts, Waitt said that the hope is that the new PCs will stir demand not only through the companys retail stores, but also via the Web and telephone sales. He also said that refocusing on low-end PCs was not counter to its push with higher end products.

"First, they drive additional traffic to our stores," Waitt said. "These are people that see all the other products we have to offer."

In addition, they are part of the larger strategy to drive more Gateway-branded products into homes, he said.

Still, much of the focus during the quarter was on turning the company into a branded integrator, with a growing variety of products. Gateway officials in June said that by the end of the summer, the company will roll out a four-processor server, which will be the fifth system Gateway has unveiled since February. The company also will launch an external storage device and digital linear tape autoloader.

Looking forward, officials said they agreed with analyst forecasts of $874 million in revenue for the third quarter and $954 million in the fourth quarter.