Gateway re-embracing PC market amid heavy Q2 losses

Company moves away from consumer strategy

BOSTON - Gateway Inc. plans to refocus its attention on the PC market as it moves away from the consumer electronics market it believed would return it to profitability a year ago, the company said Thursday during its second-quarter earnings conference call.

Those profits have not materialized. Gateway recorded a net loss of $339 million in the second quarter, ended June 30, although $289 million of that loss was attributable to restructuring and transformation charges related to the series of layoffs this year at the Poway, California, PC vendor. Revenue was $838 million, up five percent from the second quarter of 2003 but lower than the revenue guidance Gateway provided in June.

The consumer electronics strategy, unveiled in May of 2003, centered around digital televisions, cameras, audio equipment and home networking products. Gateway hoped that increased sales of these higher-margin products would help it increase revenue and profits without having to rely on the volatile and low-margin PC market. It introduced 100 new products last year in over 20 different categories.

Gateway had some initial success with its 42-inch plasma television, which it introduced at a "disruptive" price, said Toni DuBoise, an analyst with Current Analysis Inc. in La Jolla, California. But the company was unable to translate that success into other areas of the consumer electronics market.

"We were not making a lot of money on the consumer electronics side at all," said Wayne Inouye, president and chief executive officer (CEO) at Gateway, on Thursday's conference call. "It's a very difficult business model to make any money as a brand."

Gateway is not completely abandoning the consumer electronics market, but it will stop making and selling certain products over the rest of the year. It will continue to develop some of its other consumer electronics products, most likely its digital televisions.

Inouye took over the CEO position at Gateway from company founder and Chairman Ted Waitt when Gateway bought eMachines Inc. earlier this year. Inouye revived eMachines with a strategy centered around low-cost desktops and notebooks sold exclusively at retail, DuBoise said.

The integration of the eMachines products into Gateway's business paid immediate dividends, with a sharp increase in the number of PCs shipped by the company compared to last year. Gateway shipped 795,000 units in the second quarter, compared to 490,000 units in the second quarter of 2003.

EMachines desktops will be targeted at the low-end of the PC market, while Gateway-branded systems will embrace the high end. The dividing line between those two markets is around $700, Inouye said.

One of the other reasons Gateway might be pulling back from the consumer electronics market is an unwillingness on the part of national retail chains to stock Gateway-branded consumer electronics devices, said Roger Kay, vice president of client computing for IDC in Framingham.

Best Buy Co. Inc. will introduce Gateway notebooks and desktops over the course of the next few months at its stores across the U.S., Gateway announced Thursday. But that announcement did not mention Gateway's consumer electronics products.

Gateway was left without a retail distribution channel for its consumer electronics products after closing its unprofitable retail stores in April. Many analysts believe that retail outlets are crucial to the success of consumer electronics products, although Dell Inc. is attempting to prove otherwise with its own lineup of digital televisions and music players sold through its website and mall kiosks.

However, Dell determined how to maintain a lean cost structure, something Gateway is still seeking. Cost reduction has become a Gateway mantra, and it has cut thousands of jobs over the past year. The company will have fewer than 2,000 employees by the end of 2004, down from 3,400 at the end of the second quarter and around 8,500 at this time last year.

Gateway has come almost full circle in a year, from a struggling PC company to a "branded integrator" of consumer electronics devices and PCs to a lean, growing PC vendor. The company invested millions in its consumer electronics strategy, but ultimately realized that its future relies on a rekindling of its past.

"We are a PC company," Inouye said. "Our end users, whether they are consumers or (business customers), look at Gateway as a PC company. We plan to be profitable (in 2005) selling PCs and related products."

Copyright © 2004 IDG Communications, Inc.