Gateway Warning Helps Sink NASDAQ

A thumbnail of the company's Q4 financial warnings Estimated $500M shortcoming sends investors scrambling; Intel, Dell, Cisco take stock hit in wake.

Gateway Inc.s warning of slower-than-expected PC sales sent computer-related stocks reeling last week as the direct computer maker drastically lowered its fourth-quarter earnings estimates and outlook for the coming year.

In a somewhat unusual move, Gateway last week dramatically changed its rather positive forecast of only eight days earlier, based largely on poor Thanksgiving weekend sales, which the company said were down 30 percent from the same period last year.

In issuing its warning, Gateway said it expects to report revenue of approximately $2.55 billion for the fourth quarter, about $500 million below previous estimates. The company also said it expects operating income of at least 37 cents per share, or about 25 cents below analyst consensus estimates.

"I know that forecasting the quarter on one weekend is dangerous, but the miss over the weekend was just too significant," said John Todd, Gateways chief financial officer, in a call with market analysts last week.

The computer makers announcement rocked the technology markets as the San Diego-based company blamed its troubles on a slowing global economy, weakening customer demand and aggressive market pricing that is pushing down profit margins—issues that would ultimately negatively impact PC manufacturers and component makers as well.

"I think its going to be an ugly PC season," said Eric Rothdeutsch, an analyst with Robertson Stephens Inc., in San Francisco. "Theres a lot of inventory in the channel, [and] companies are aggressively slashing prices, so I think we will see more negative news out of the other PC makers."

Indeed, investors reacted swiftly to Gateways announcement, selling off Gateway shares and pushing down stock prices of several high-tech industry leaders including Intel Corp., Microsoft Corp., Dell Computer Corp. and Cisco Systems Inc.

On Nov. 30, the day following Gateways announcement, the NASDAQ Composite Index dropped 109 points, or 4 percent. Gateways bleak outlook, coupled with recent economic uncertainty, resulted in NASDAQ recording its worst monthly performance since the 1987 stock market crash.

"For the first time we are seeing the impact of economic slowing, which will affect the next several quarters," Gateways Todd said.

But some analysts took issue with Gateways sudden "awareness" of a slowing global economy, particularly in light of recent reports by Dell, IBM and Hewlett-Packard Co. citing economic downturns in regions such as Europe.

"For a number of months we have been talking about the weakening retail/consumer segment," said analyst Don Young of UBS Warburg, in Stamford, Conn. "Gateway management has been adamant about seeing no signs of a slowdown—and, in fact, just the opposite."

Highlighting Gateways sudden turnabout, analysts pointed out that just eight days before the company issued its warning, officials had told analysts they expected strong holiday sales based on Gateways 16 percent revenue gain for the third quarter.

"Supposedly in one weekend, [Gateway spotted] a complete change in global consumer spending," said UBS Warburgs Young.