Fashionably late out of the box as always,
still managed to churn out a solid first quarter, earning $100 million, or 62 cents a share, beating the
consensus estimate of 60 cents a share. In the year-earlier period, the company earned $76 million, or 48 cents a share. Revenue climbed 23% to $2.1 billion from $1.7 billion a year earlier.
PC unit sales were slightly stronger than expected, coming in at 1.1 million, good for a robust 42% year-over-year unit sales increase. The result is further evidence that
problems were company-specific, and not indicative of a larger, industry-wide slowdown in PC demand this quarter.
The company may have held earnings down a bit because Gateway's second quarter is traditionally its worst of the year, says one Wall Street analyst, who requested anonymity and has a buy rating on the stock. Last year, Gateway missed earnings estimates by 6 cents a share in its second quarter.
Gateway closed up 3 15/16, or 6%, at 69 15/16 Thursday.
The following story was posted at 7:00 a.m. EDT:
Gateway Goes After the Business Market
In a big publicity push,
is blitzing the country this week with print advertisements promoting its
for business program. This is a leasing program, similar to the one for consumers introduced last year, that allows businesses to replace their computers every two years.
The success of this strategy depends on the health of the corporate market, but many observers are concerned that severe price competition will soon engulf this space.
PC companies may be doomed to the fate of the old television makers -- that is, back when U.S. companies made TV sets. Despite plummeting prices, PC makers are doing little to separate themselves from their peers and rivals. No wonder investors have sent PC stock prices into a tailspin over the last two months.
In the consumer sector, the sub-$1000 models have already made a big dent. But PC makers looking to corporate sales to recoup profits could be in for a rude surprise. During its conference call Wednesday,
blamed the commercial sector as the main culprit in the company's weaker-than-expected first quarter.
Compaq, now temporarily
headed by co-founder Ben Rosen, reported earnings Wednesday of $281 million, or 16 cents a share, on revenue of $9.4 billion -- as much as $500 million below initial estimates. Company officials hinted in the conference call that its revenue shortfall in the commercial space will continue.
Other companies affected by a continuation of weak corporate demand will be
, pioneer of the direct corporate sales model.
But the company that could be even more directly impacted is Gateway, which reports earnings for its first quarter Thursday after the close. Analysts expect the company to earn 60 cents a share on revenues of $2.1 billion, from last year's profits of 48 cents a share on $1.7 billion in sales. PC unit sales estimates hover just above one million and average selling prices, or ASP's, should fall sequentially to around $1,930, off 4% from last quarter's $2,003.
About 70% of Gateway's total revenues come from consumer PC sales. Gateway has enjoyed great success courting America's consumer. So much so that when Dell's Carl Everett, the company's personal systems group head, told analysts two weeks ago about Dell's strategy to appeal to consumers, it sounded like a page out of Gateway's book. "It was exactly like Gateway's -- usually it's the other way around," says Randy Befumo, an analyst at
Legg Mason Fund Adviser
. "Gateway actually seems to be ahead of Dell in the consumer space."
From its homey advertising campaign featuring CEO Ted Waitt and his father to its cow-spotted boxes, the company has "created more of an emotional connection to its brand among consumers than maybe even Dell," says Befumo, whose firm owns significant positions in both stocks.
But Gateway management would like to boost its corporate sales in the future since that market offers better profit margins.
Gateway's corporate business has a long way to go to catch up with Compaq and Dell. According to the latest figures from
, Gateway was No.7 in corporate PC sales in the U.S. by the end of last year. The San Diego-based direct seller (Gateway recently moved its headquarters from North Sioux City, S.D.) had 4.4% of the U.S. corporate market, compared to Compaq at 18.8% and Dell at 18.5%. Gateway is in its quiet period, so company officials weren't available for comment.
Stealing market share in the corporate space from rivals Compaq, IBM and Dell won't be easy, especially since they have established beachheads with the Fortune 500 companies. Inroads could be made with small businesses, for whom Gateway's leasing program could be an attraction. Nevertheless, profit margins will be squeezed with Gateway's greater push.
"Look for some more ugly news out of selected PC companies and then some consolidation as the year goes on," predicts one money manager, who requested anonymity and owns Dell shares.
Gateway must hope that enough business owners are enticed by its YourWare program to make it a force. Only that way can it hope to be the hunter and not the prey.