Shrunken Gateway to Get Even Smaller
Computer maker Gateway Inc. said Thursday that it would cut about 1,500 jobs, or 43% of its workforce, by the end of the year despite whittling its first-quarter loss by 17%.
The reductions will come on the heels of the 2,500 jobs that the company eliminated this month when it closed its 188 retail stores, part of Chief Executive Wayne Inouye’s plan to slash costs and put Gateway products in electronics chains like Best Buy and Circuit City.
Inouye, who became CEO in March when Gateway bought the company he headed, rival computer maker EMachines Inc. of Irvine, is known as a relentless cost cutter.
His decision to close Gateway’s stores was seen as necessary by Wall Street.
By the end of the year, Gateway will have about 2,000 workers.
At its peak in 2000, the company that had its roots in Iowa had grown into one of the nation’s largest PC makers, with nearly 24,500 workers.
“This is a company that has to significantly lower its costs,” said Steve Kleynhans, an analyst based in Toronto with Meta Group, a technology industry analysis firm.
“Gateway is going to start looking a lot more like EMachines, which is a very tightly run company.”
That was evident in Gateway’s first-quarter results, which showed a loss of $166 million, or 49 cents a share. In the same period a year earlier, Gateway lost $200 million, or 62 cents a share. Revenue rose 2.8%, to $868 million.
The company is moving its headquarters from Poway, just north of San Diego, to Orange County.
Chief Financial Officer Rod Sherwood told analysts he was “comfortable” with second-quarter consensus estimates of $798 million in revenue and an operating loss of 15 cents a share, before restructuring costs.
Sherwood said the company expected to be profitable in 2005.
Gateway reported results after the markets closed Thursday.
Its shares fell 14 cents, to $5.31, in regular New York Stock Exchange trading and fell to $5.20 in after-hours trading.
The company took a charge of $104 million, or 31 cents a share, in the first quarter to partially absorb the cost of dismantling its nationwide store network. Further charges of $400 million to $450 million are planned in the coming quarters to cover severance packages for employees, lease liability and other costs, Sherwood said.
Closing the stores will save about $60 million a quarter, Sherwood said.
He predicted the $300 million in revenue the stores contributed quarterly would be made up through online and phone sales, and sales from the electronics chains.
The company hopes to place its Gateway-brand personal computers and possibly other consumer electronics alongside EMachines PCs in national retail chains later this year.
The company is negotiating with Best Buy Co., Circuit City Stores Inc. and other retailers in the U.S. and overseas, and its products should appear on retail shelves by the back-to-school season, Inouye said in a conference call with analysts.
Gateway will be positioned as the “premium” brand and EMachines as the “value” alternative, Inouye said.
The two-pronged strategy is similar to that of Hewlett-Packard Co., which sells its HP and Compaq brands side by side -- at some risk, Kleynhans said.
“I think Gateway will run into a similar problem: how to differentiate those lines clearly to the end user,” he said. “They need some obvious differentiation between the lines, otherwise they will end up cannibalizing each other.”
In an interview, Inouye acknowledged the difficulty of merging the two corporate cultures.
EMachines workers view Gateway’s staff as bloated and spendthrift; Gateway employees see the EMachines workers as swaggering with a newfound self-importance, insiders say.
“If guys are bad, they can go stand in the corner,” said Inouye, who is fond of one-liners.
“But seriously, it’s a tough process. It requires coaching, and we’ve hired a third party to help us with it.”
