Gateway ( GTW) shares drifted up slightly in after-hours trading Thursday as investors gave the thumbs up to a newly announced deal to sell company-branded computers in hundreds of Best Buy ( BBY) stores across the U.S. Gateway's second-quarter earnings report was mixed, with the Poway, Calif.-company posting a shortfall in revenue but a slightly narrower-than-expected loss. In recent trading the stock was up 5 cents, or 1.2%, to $4.40. In regular trading Thursday, shares closed down 5 cents, or 1.1%, to $4.35. Hurt by restructuring charges, the PC and consumer gadgets maker reported a wider second-quarter loss of $339 million, or a loss of 91 cents per share, compared to its year-ago loss of $73 million, or 22 cents a share. Gateway's second-quarter loss includes $289 million in previously announced restructuring, transformation and integration costs. On a pro forma basis, the loss amounted to $49 million, or 13 cents per share, which Gateway said was the smallest loss in 10 quarters. The pro forma result was just slightly better than Wall Street's consensus estimate for a 14-cent loss. Revenue of $838 million was up 5% from the prior year but below Gateway's guidance for $860 million to $880 million, and also short of the consensus expectation for $860.3 million. Gateway attributed the shortfall to delayed deliveries in the professional segment. Sequential sales were down 4% due to the closure of Gateway's retail stores and a seasonal decline in consumer sales, offset by some growth from the recent acquisition of discount computer vendor eMachines. Gateway sold 795,000 PC units in the second quarter, up 32% from the prior quarter and 62% from the year-ago period, which Gateway said marked the highest level in 11 quarters. The greater volume reflects the merger with eMachines, partly offset by the closure of Gateway stores, the company said.
The company said it expects third-quarter revenue of $900 million to $950 million, compared to the consensus estimate of $922.6 million. It projected a third-quarter loss of 19 cents to 24 cents, including restructuring costs, of $40 million to $60 million. On a pro forma basis, its EPS loss should range from 7 cents to 9 cents, in line with the Wall Street consensus for an 8-cent loss. Gateway repeated that it expects to be profitable for 2005. In a statement, CEO Wayne Inouye said Gateway has made progress in widening the distribution of its hardware, noting that Best Buy -- his former employer -- will start carrying Gateway-branded notebooks and desktops in the third quarter. Two notebooks will debut at Gateway later this month, with desktop models appearing in August throughout Best Buy's network of 622 stores. Gateway will be cast as a premium brand, while eMachines will be pitched as a value brand, the company said. Gateway is still hashing out plans to get other retailers to carry its products and expects to offer more details in coming weeks, Inouye said. The company will initially talk up its PC line relative to consumer electronics products, though it will continue to develop and market the latter, he said. Consumer electronics and other non-PC related revenue accounted for 22% of Gateway's total sales in the second quarter, down from 30% in the first quarter. Following on previously announced layoffs, headcount at Gateway had fallen to 3,400 at the end of the second quarter from about 8,500 at the close of 2003. By year's end the payroll will be below 2,000, Gateway said.