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 THE STAT 26Percentage of wireless customers who use their cell phones to take picturesMore Vitals
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NOVEMBER 4, 2003
For Investors, a Gateway to What? They're pondering whether the struggling PC maker's foray into consumer electronics will lead to renewed growth or go nowhere Last May, PC maker Gateway decided on a radical and ambitious transformation. To end years of losses -- including a deficit of $298 million in 2002 on revenues of $4.2 billion -- it would sell not only computers, where it was steadily losing market share, but also consumer electronics, for which demand was hot. What's more, it would help customers integrate various devices, so that they could, for instance, edit a home video on a PC, then show it on the family TV to the sound of a custom-selected digital tune. That decision came amid a restructuring that has prompted San Diego-based Gateway (GTW ) to lay off 2,500 employees, or 23% of its workforce, since January, and to set plans to eliminate 1,800 more jobs by mid-2004. Since the beginning of the year, Gateway also has closed 80 retail stores and remodeled the remaining 185 to better display its 75 new products. The net effect has been to reduce its cost of sales to the lowest level in five years. Gateway has also shuffled its management lineup, bringing in four new senior executives from places such as consumer electronics giant Sony (SNE ). Whether those efforts will turn this caterpillar into a butterfly will become apparent this Christmas, says Megan Graham-Hackett, an analyst with Standard & Poor's. The foundation for success is there: Though price-cutting is keeping PC revenues essentially flat industrywide, unit sales are rising at a double-digit annual rate for PC makers, and Gateway still gets 72% of its revenues from PCs (see BW, 11/10/03, "PCs: The Elves Are Working Overtime"). MORE LOSSES COMING. Moreover, dollar sales in the $114.5 billion market for consumer electronics, which will provide the rest of Gateway's revenues, will grow 3.8% this year, according to market consultancy ARS Inc. Unit sales of products that Gateway is particularly stressing -- such as flat-panel TVs -- are growing at more than 50% annually. While Gateway is hoping to ride these trends, many on Wall Street are waiting to see the money before they turn optimistic. On Oct. 23, Gateway reported a wider-than-expected, $139 million third-quarter loss -- double last year's. Its $883 million in sales were 20% below last year's. And Gateway told analysts to expect a loss equal to 9 cents to 15 cents a share, or $29 million to $49 million before restructuring charges, in its seasonally strongest fourth quarter. Wall Street analysts have been expecting a nine-cent loss. Analysts polled by financial service First Call forecast Gateway to lose 92 cents a share, or $298 million, for the full year. The Oct. 23 news triggered a sell-off, knocking the stock down 24% on Oct. 24 to $4.62, or 32% below its 52-week high of $6.85 on Sept. 18. "NO CONTROL." A few analysts see this as a buying opportunity. On Oct. 28, Michelle Gutierrez, an analyst with investment bank SoundView Technology, raised her rating on Gateway from neutral to outperform and set a $6 target price (the stock has since risen to $5). Yet, cautious investors might want to wait for clearer signs of Gateway's progress before jumping in, if only because "it has no control over its own destiny," says Henry Asher, president of Northstar Group, a New York-based money manager that doesn't hold Gateway shares. "Both PCs and consumer electronics are extremely competitive markets," says Bill Fearnley Jr., an analyst with FTN Midwest Research. "And they are now fighting two fights at the same time." With more than $400 million in cash and equivalents, Gateway doesn't need additional funding to get to break-even. But it might not achieve profitability until the second half of 2005 -- and then only if its consumer-electronics sales soar, says Graham-Hackett. The problem there, of course, is that competition is even more severe than in PCs. More than 80 companies manufacture DVD players alone. Pressured by cheaper Asian rivals, Sony, with $62.3 billion in annual sales, just announced 20,000 layoffs. And the plot is thickening, as giant computer makers Dell (DELL ) and Hewlett-Packard (HPQ ) have also entered consumer-electronics market in the past year. "This isn't the Mickey Mouse club," says Asher.
BW MALL
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