Gateway Revenue Falls Short

In a preview of its upcoming January 24 earnings call, computer-maker Gateway announced domestic unit sales will fall 15 percent sequentially in the fourth quarter and it expects to record revenue of $1.16 billion — 17 percent below analysts’ expectations and 53 percent below year-ago numbers.

The announcement, which was made late Monday, was a sharp contrast to Compaq’s upbeat forecast and proved to be a disappointment as investors sold off Gateway stock by about 20 percent in Tuesday trading.

On the positive side, the Poway, California, company reported its focus on higher-end units, those with price points above $800, resulted an increase in average unit prices of $87. Its average units sold at $1,660 in the fourth quarter. This equates to an increase of five percent more per unit sold and resulted in the first sequential price increase in a year, according to Goldman, Sachs & Co.

“Our fourth quarter performance shows we’re making solid progress on our strategy of delivering integrated technology solutions,” said Ted Waitt, Gateway’s chairman and CEO. “It’s clear that a significant portion of market demand was at the very low end of the PC market in the fourth quarter, driven largely by aggressive pricing and promotions. We stayed focused on our strategy and targeted higher-end customers during the holiday selling season, which allowed us to meet our previous guidance of returning to profitability, our primary goal.”

Based on Gateway’s new guidance, Goldman raised its 2001 earnings per share target from ($0.01) to $0.01 but remained cautious about Gateway’s decision to focus on the high-end market. Goldman’s 2002 earnings estimate of $0.19 remained unchanged.

“In our view,” said Goldman Analyst Joe Moore in his report, “the market share shortfall in a reasonably normal Christmas season is a concern despite the company meeting its profitability goals. We are cautious on the shares near term, with few catalysts and seasonal softness in the next couple of quarters.”

If Goldman’s fourth quarter earnings estimates prove accurate, then Gateway will have turned a profitable quarter despite its revenue shortfall. While “impressive,” said Moore, he is more concerned with the company’s ability to grow its top line numbers, which were negatively impacted by Gateway’s decision to focus on higher price point units.

“If the company is redefining its market more narrowly once again, to the
market above $800, the top line will continue to come under pressure, which
in our view is a more significant concern despite the offset that they have
achieved [in] operating profitability,” said Moore.
Although Moore remains somewhat bullish on the stock, he is concerned about Gateway’s shrinking revenue steam and the need to offset fixed costs associated with its bricks and mortar store operations.

“[T]he lack of revenue momentum in the Christmas quarter is a significant concern, and even assuming that the strategic ramifications of focusing on the high end of the market turn out to be positive, we aren’t likely to return to a sequential growth profile until the second half of 2002. As a result, we are inclined to remain on the sidelines until we get closer to such visibility emerging,” he said.

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