Gateway Moves to Stem Wounds

But high inventory and weak consumer demand dog faltering PC maker

After gateway inc. founder Ted Waitt took over his faltering company last week, he moved swiftly to appoint a new management team and outline his vision for returning the PC maker to profitability.

But that vision is going to have to be executed by a company suffering from the effects of poor management decisions and by one operating in a PC industry that has been economically crippled in recent months.

The nations No. 5 PC maker took a $94 million loss last quarter that resulted from a 15 percent drop in consumer PC sales. It is hampered by a high inventory of computer parts in an economy that continues to cool and consumer demand that continues to weaken.

Given all that, analysts are skeptical that Waitt will be able to quickly revive Gateways flagging fortunes.

"Theyre too heavily dependent on the consumer segment," said Roger Kay, an analyst with International Data Corp., in Framingham, Mass., contending that the company will struggle as long as the economy remains weak. "They dont have commercial business to fall back on as their other competitors do, and they also dont have international diversification to the degree that they should."

At best, all Gateway can hope for in the next few months is to reduce costs and strive to hold market share, said Ashok Kumar, an analyst with U.S. Bancorp Piper Jaffray Inc., in Minneapolis. Two-thirds of Gateways revenues come from the consumer and small-business segments, which Kumar said will be the slowest growing and most competitive.

Waitt, 38, took back the role of CEO following the sudden departure of Jeff Weitzen, 44, who had been in the position for only a year. While the company said Weitzen retired, analysts and sources said he was ousted over Gateways recent poor performance results.

Gateway officially said the board of directors voted to make the move, but sources said that Waitt, as board chairman and the largest shareholder, effectively controls the board, and the decision was his.

Weitzens downfall ultimately resulted from his decision to build up inventory of computer components during the third quarter despite indications that the U.S. and global economies were slowing. When an expected increase in PC demand failed to materialize in November, Gateway was stuck with large amounts of quickly depreciating computer components.

"Jeff made a bad bet," said analyst Rob Enderle of Giga Information Group Inc., in Santa Clara, Calif. "If he had made the right bet, he would have been a hero. But he gambled and lost. Gateway built up a rather substantial amount of inventory toward the end of the year in the face of slowing sales. It was clearly a gamble, and Gateway lost the bet. As a result, the bill came due and payable, and weve got a new CEO."

Weitzen joined the ranks of Gateways unemployed less than a month after announcing cost-cutting initiatives that included laying off more than 3,000 workers—about 12 percent of Gateways work force.

Several workers at a Gateway facility said last week that employees had lost faith in Weitzen, who came to Gateway from AT&T in 1998 as president and chief operating officer, during the companys latest struggles. But not all of Gateways problems can be laid at Weitzens feet. Even before his tenure, the company had failed to diversify, instead pinning its future on the consumer market, analysts said.

The weak economy and slower-than-expected PC sales hurt many of the computer industrys leading players. Aside from Gateway, companies that were forced to issue fourth-quarter warnings included Compaq Computer Corp., Dell Computer Corp., Hewlett-Packard Co. and Intel Corp.

On his first day back last week as chief executive, Waitt wasted no time in shaking things up. He replaced two senior managers and eliminated an undisclosed number of executive positions.

While he avoided directly criticizing his former CEO, he was clearly dissatisfied with the companys recent shortcomings.

"My management style is a lot different than Jeffs. What I needed was a faster, more experienced, more aggressive team, yet something that still combined broad-based industry experience with solid business acumen," Waitt told analysts in a conference call.

In the sweeping changes, Joe Burke, who joined Gateway in 1995 as vice president for market development, was named to replace John Todd as chief financial officer. Bart Brown, a 12-year company veteran, was named senior vice president, Gateway Consumer, replacing Cliff Holtz. Brown most recently oversaw Gateways "beyond-the-box" strategies, which include sales of peripherals, Internet access and services.

Neither Todd nor Holtz remained with the company.

Waitt said he was reluctant to address specific problems publicly since he hadnt been involved in Gateways day-to-day operations for a year. He refused to take questions in the conference call with Wall Street analysts, but promised to provide them with details and a chance to question him at length at a previously scheduled analyst meeting to be held Feb. 28.

However, Waitt did offer a broad outline of issues he would address. He reiterated Gateways intent to drastically lower prices, a move similar to Dells that has raised the possibility of a price war in the PC industry.

"The top priority is to grow this business," Waitt said. "Were going to be aggressive on pricing, were going to move forward, were going to have to realign the cost structure so the business will continue to be profitable."

While the company remains committed to extending its beyond-the-box initiatives, it may curtail future openings of Gateway Country Stores, the direct PC makers retail outlet, Waitt said.

He also vowed to work hard to win customers back.

"Itll be exciting to see what happens," said Dan Niles, an analyst with Lehman Brothers Holdings Inc., in San Francisco. "There are obviously a lot of changes going on, and it may be a while before well see the results of that."