Gateway mumbles something about profitability

Gateway says it's on the way back to profitability, despite weak first-quarter PC demand resulting from economic uncertainty and war jitters.

Demand for PCs has been relatively weak so far in 2003, with only about three weeks left in the first quarter, the company said.

"Demand in general remains soft. The macro picture is cloudy with the (possible Iraqi) war and overall economy," Rod Sherwood, Gateway's CFO, said on Wednesday while speaking at a conference organised by Morgan Stanley.

Later Sherwood added, that it's "relatively weak out there. I'd think it's a little bit weaker than normal, (in terms of) seasonality."

The current situation doesn't bode well for Gateway or any of its competitors or suppliers, but the company believes its latest reorganisation plan will help it return to profitability by the fourth quarter, Sherwood said.

That plan, which is still being reformulated in some areas by new department heads hired over the past few months, boils down to two basic priorities for 2002, Sherwood said: growing the PC business, while lowering general and administrative expenses - the bulk of which comprised salaries and company operations such as human resources - and cutting costs for things like components and product warranties.

Citing a scenario in which Gateway lowers its selling, general and administrative expenses to less than $200m - a target it expects to hit during the second quarter - and increases revenue, while cutting $300m or more in costs, Sherwood said: "Clearly that will get us a long way toward the objective of fourth-quarter profitability."

So far, Sherwood said that due to some of the measures Gateway has already put in place, selling, general and administrative expenses for the first quarter would be consistent with the company's fourth-quarter 2002 levels, which were $249m. The company originally expected expenses to increase sequentially.

Sherwood said Gateway's plan would likely involve closing more Gateway retail stores and working to "right size" the staff of some operations, but he otherwise declined to elaborate on layoffs or other potential methods of reducing expenses. The company, which closed four stores earlier this year, will provide more information on its plans at a later date, he said.

While it looks to trim operations, Gateway will seek to drive profitability by bolstering its PC business with new products and programs that improve its relationship with its customers.

Gateway plans to refresh its business product line by bringing out new servers, storage devices and network appliances. These new products, including servers that offer Microsoft and Linux operating systems, will start coming out in the April time frame, Sherwood said.

Gateway is also looking at a number of potential product categories, including a convertible tablet PC and a line of handhelds. It also intends to launch new notebooks based on Intel's Centrino family of chips.

A new all-in-one Profile 5 desktop, along with an "ultrasmall" desktop will come later in the year, Sherwood said.

The company also plans to add new "digital solutions," which are Gateway-branded consumer-electronics products along the lines of the company's 42-inch plasma display launched before the holidays.

John G. Spooner writes for News.com