Gateway Posts $339 Million Loss

Its purchase of eMachines in March set off big changes at the company, from closing retail stores to announcing layoffs to adding eMachines computers into the financial mix.

Gateway Inc. continued to feel the financial impact of its acquisition of eMachines Inc. in the second quarter, particularly in the results of the closing of its 188 direct retail stores, the layoffs and the first full quarter of adding sales of eMachines computers into the financial mix.

The Poway, Calif., company on Thursday reported a second-quarter loss of $339 million on $838 million in revenue. The loss was significantly larger than the $73 million loss in the same period last year, although revenue climbed by $38 million from the second quarter of 2003.

The revenue was below the companys projected range of $860 million to $880 million, due in part to delays in delivering about $26 million in products until the first week of this month, said Wayne Inouye, Gateways president and CEO and the former CEO of eMachines.

He said the product delays were due to logistics issues and that the money would be put onto the companys books this quarter. Sherwood projected revenue for the third quarter at between $900 million and $950 million.

Overall, the quarter reflected the changes resulting from the $290 million purchase of eMachines in March, said Rod Sherwood, senior vice president and chief financial officer at Gateway.

While Gateway felt the loss of direct sales due to the closing of its retail stores, it was boosted by the addition of sales of eMachines products, resulting in a 4 percent drop in revenue from the first quarter but a 5 percent bump over the same period last year.

Gateway sold 795,000 PCs in the second quarter, a 32 percent jump over last quarter and a 62 percent increase over the year-ago quarter. Again, Sherwood said, those gains were partially offset by the closing of the stores.

Gateway also sold $46 million in excess inventory from the closed retail stores.

PC sales should see a jump when Gateway-branded laptops begin to line the shelves at Best Buy Co. Inc. outlets this month, with desktops joining them in August, Inouye said. Best Buy and other outlets also will continue to sell eMachines computers, which will complement the Gateway products, he said. Gateway computers will be the premium systems, priced at $700 and above; eMachines will sell at below $700.

Inouye said Gateway also is negotiating with other electronic outlets to sell its branded products.

Gateway will continue to feel the impact of the acquisition as it streamlines its operations. The company plans to pare down its payroll to fewer than 2,000 employees, down from 3,400 at the close of the second quarter.

In addition, the company will return to leveraging its history as a PC maker, Inouye said. Prior to the acquisition, chairman and then-CEO Ted Waitt was pushing the company to expand beyond its PC roots, deeper into consumer electronics and other areas.

But in a conference call with analysts and reporters Thursday, Inouye said the company will de-emphasize consumer electronics products, focusing instead on PCs and related products.

/zimages/2/28571.gifRead more here about Gateways move out of the consumer electronics space.

"We are a PC company," he said. "Our end users … look at Gateway as a PC company. We will leverage our core competencies in building computer products. … We plan to be profitable at building PCs and related products."

The company plans to return to profitability in 2005, Sherwood said.

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