Gateway Sees PC Sales Fall as Rivals Pull Ahead

Gateway (NYSE: GTW) has announced that its transformation from a PC retailer to a more diversified company accelerated in the first quarter. The gap between the company and its major PC competitors widened, but sales of its specialty products and home electronics rose.

The company added to its string of quarterly losses, chalking up US$200 million in red ink, some $78 million of which was tied to an ongoing restructuring effort. Revenue fell to $844 million from $992 million a year ago and $1.06 billion in the fourth quarter.

"We're going through a major transformation of our business, but we are already seeing results," Gateway CEO Ted Waitt said. He emphasized that although Gateway will continue to roll out non-PC products, such as servers and plasma televisions, it also is "pushing hard to reinvent our core PC business."

Keeping the Pace?

But research firm IDC said Thursday that Gateway is struggling to keep pace in the PC arena.

In the United States, the company's PC sales dropped more than 20 percent in the quarter, according to IDC, even as the overall industry saw growth of 1.5 percent. IDC ranked Gateway as the fourth largest PC seller in the United States, with 4.3 percent market share, down from 5.6 percent a year ago.

"Gateway continued to suffer from aggressive price competition" and "continues to lose ground," the research firm said in its report.

Revising the Cost Structure

Morningstar.com stock analyst Joseph Beaulieu said Gateway has been struggling to regain its footing for some time, largely because its cost structure left it unable to quickly adjust to the slowdown in the market for personal computers.

"They're trying to tackle the cost side and are doing what they can to revive growth by diversifying their product lineup," Beaulieu told the E-Commerce Times. He added that an uptick in the economy will be critical to Gateway's plan to focus more on high-cost, high-margin products like expensive consumer electronics.

IDC analyst Roger Kay agreed that it will take time before Gateway can rein in costs enough to right itself and attack the market from another direction.

"They've got the right targets in mind, in terms of the enterprise market and higher-margin PCs," Kay told the E-Commerce Times. "But they need to be on a stronger financial footing to make a strong push."

Making Progress

Gateway's restructuring plan, which calls for it to lay off 1,900 workers and close many of its Gateway Country stores, eventually will save $400 million per year, according to the company, and will help it regain profitability.

CFO Rod Sherwood said Gateway will stay the course, but a quick fix is unlikely.

"We think we've got to continue our momentum of cutting costs and building up our digital and enterprise sales," he said in a conference call. Gateway stuck by its previous goal of turning cash-flow positive by the end of the year.

Branching Out

Already, the company has grabbed a double-digit share of the market for plasma televisions. It recently released a line of digital projector products aimed at small and mid-size businesses and has two new server products waiting in the wings for release in the current quarter.

"My No. 1 goal is to transform Gateway from a personal computer company into a branded integrator," Waitt said.

Non-PC sales made up 24 percent of total revenue in the quarter, up from 20 percent last year, Gateway said.