Drive Toward Simplification, Cost Reductions Follows eMachines Merger
POWAY and IRVINE, Calif., April 29 /PRNewswire-FirstCall/ -- Gateway, Inc.
today preliminarily reported revenue of $868 million for the quarter ending
March 31, 2004, compared with $875 million in the fourth quarter of 2003 and
$844 million in the prior year period.
(Logo: http://www.newscom.com/cgi-bin/prnh/20020930/LAM050LOGO)
The company preliminarily recorded a first-quarter net loss of
$166 million, or 49 cents per share, which includes restructuring charges and
transformation expenses of $104 million, or 31 cents per share, and a tax
benefit of $13 million, or 4 cents per share. Excluding these items, net loss
was $75 million, or 22 cents per share. Gateway reported a net loss in the
previous quarter of $114 million, or 35 cents per share, and a net loss a year
earlier of $200 million, or 62 cents per share. Prior losses included
$65 million and $78 million, respectively, of restructuring and transformation
costs and tax provisions.
The company's first-quarter financial statements include the operations of
eMachines, Inc., from March 12, 2004, when Gateway's acquisition with that
company was completed. Financial results contained in this press release are
preliminary and subject to change due to the fact that Gateway is working both
to finalize tax provision numbers in connection with recent tax-authority
settlement discussions and to incorporate updates on certain legal settlement
negotiations between now and the filing of the first quarter's 10Q. This
filing, which will contain final financial results, will be made on or before
May 10, 2004.
"We are in the midst of a far-reaching effort to simplify our business and
fundamentally change our cost structure as we push toward a return to
sustained profitability," Gateway's CEO Wayne Inouye said.
"We are making solid progress in simplifying our organization, our
products and our processes. Following the closing of our Gateway stores, we
are focused on expanding distribution of Gateway PCs and consumer electronics
products at leading retailers in the U.S. and abroad. We are also working hard
to strengthen our Professional and Consumer phone and web channels, which
remain core to our business," he said.
Simplifying structure
Following the eMachines merger, a new executive leadership team was named
that includes both key Gateway executives and a number of eMachines executives
who successfully turned around the value PC maker under Mr. Inouye's
leadership. This team immediately began a comprehensive review of all aspects
of the combined company's business, identifying opportunities for
simplification and cost savings.
A key benefit of the Gateway-eMachines merger is the opportunity to modify
Gateway's channel strategy for more cost-effective distribution and marketing.
As a result, Gateway closed its 188 retail stores on April 9. Negotiations
with top PC and electronics retailers in the U.S. and abroad are underway to
significantly expand the availability of Gateway products and enhance customer
consideration.
"We're very encouraged by our discussions with potential retail partners,
and we believe Gateway will have strong channel presence by the fourth quarter
when demand will peak for the year," Mr. Inouye said.
Simplifying products and processes
In addition to streamlining distribution and marketing activities, the
company is identifying ways to simplify its product line and business
processes to further strengthen its competitiveness.
It is working to reduce the number of PC platforms utilized across its
Consumer and Professional product lines, and to improve the use of common
parts. These actions facilitate component-cost reductions and more cost-
effective after-sale customer support, in addition to improved customer
satisfaction.
The company's two brands and three major product categories - eMachines
PCs, Gateway PCs and Gateway consumer electronics (CE) products - are
complementary. As the Gateway brand joins eMachines products on retailers'
shelves, they will be clearly differentiated:
* eMachines PCs: value brand
* Gateway PCs: premium brand
* Gateway CE: premium alternative to lesser-known, low-cost brands
In the Professional segment, systems will be offered under the Gateway
brand that benefit from eMachines' highly efficient product-development
practices and fulfillment model, strengthening the value it delivers and
enhancing its competitiveness in the SMB and public-sector segments.
Gateway has simplified and realigned its organization to allow greater
focus on front-line selling and better sharing of common resources. The
organization has been flattened, eliminating about two dozen positions at the
vice president level and above and ensuring that management stays connected to
customers. And the company's compensation structure has been overhauled to
increase performance-based compensation and institute a more uniform pay scale
across the organization.
Location and staffing
To enhance efficiency, the company is in the process of concluding efforts
to secure a new, consolidated head office location in Orange County, to which
it plans to relocate this summer.
In addition, the company continues to seek efficiencies in staffing while
preserving customer service levels and operational effectiveness. As Gateway
moves to an increasingly efficient organization, it anticipates that by year-
end its employee base will be reduced to about 2,000 people, compared with
approximately 3,500 following the closure of its stores.
These staff reductions will result from a broad range of measures that are
being implemented to simplify company processes, streamline product
development, leverage eMachines' highly efficient fulfillment model and
improve the efficiency of direct-sales activities.
Quarter sales
Gateway sold 604,000 PC units in the first quarter, up 15 percent
sequentially and 19 percent year-on-year. The quarterly and year-on-year
increase was the result of the merger with eMachines and its PC unit
contribution from March 12 through March 31.
In the Consumer segment, revenue was $524 million, including sales of
388,000 PCs. Sequentially, Consumer revenue and PC units increased 7 percent
and 46 percent, respectively. Year-over-year, Consumer revenue increased
8 percent and PC unit sales increased 46 percent. Increases in both Consumer
revenue and PC unit sales were due to sales of eMachines units which more than
offset a decrease in Gateway PC revenue and units.
In the Professional segment, revenue was $344 million, with PC unit sales
of 216,000. Sequentially, Professional revenue declined 10 percent and PC
unit sales fell 17 percent, reflecting the Professional segment's seasonal
trends and market share losses. Year-over-year, Professional revenue
decreased 5 percent and PC unit sales declined 10 percent.
CE/non-PC revenue was $260 million, down 3 percent sequentially and up 30
percent year-on-year. CE/non-PC revenue as a percentage of total revenue was
30 percent, down from 31 percent the previous quarter and up from 24 percent a
year earlier. CE revenue alone was $94 million, down 8 percent sequentially
as a result of normal seasonality and up more than 150 percent year-on-year.
CE revenue as a percentage of total revenue was 11 percent, down from 12
percent the previous quarter and up from 4 percent a year earlier.
Pre-tax loss
Gross margin was 13.2 percent (which includes 1.2 percentage points impact
from restructuring and transformation expenses), compared with 15.0 percent in
the previous quarter (which includes 1.3 percentage points impact from
restructuring and transformation expenses) and 12.6 percent in the first
quarter of 2003 (which includes 1.5 percentage points impact from
restructuring and transformation expenses).
Selling, general and administrative costs (SG&A) amounted to $296 million
in the first quarter, compared with $224 million in the fourth quarter and
$308 million in the first quarter of 2003. Included in the first, fourth and
prior-year's quarter SG&A levels are $93 million, $30 million and $65 million,
respectively, of restructuring and transformation costs.
Pre-tax loss was $176 million in the first quarter compared with
$88 million in the fourth quarter and $198 million in the first quarter of
2003. Pre-tax loss before restructuring and transformation expense was
$72 million in the first quarter, up from $47 million in the fourth quarter
and down from $120 million in the first quarter of 2003.
Restructuring charges, transformation expenses, tax provisions
The company incurred in the quarter a restructuring charge of $81 million,
related primarily to retail store closures, and transformation expenses of
$23 million, related primarily to outsourcing transition costs. The company
preliminarily reported a tax benefit of approximately $13 million.
For full year 2004, Gateway expects to incur new restructuring and
transformation costs of $400 million to $450 million, in addition to
$25 million of costs associated with prior actions. The new costs relate to
retail store closures, rationalization of facilities, service and support
contracts, and streamlining the IT infrastructure and ongoing SG&A structure.
The closure of the retail stores is expected to impact future revenue by
approximately $300 million per quarter and to reduce expenses by approximately
$60 million per quarter. Gateway is working to offset these revenue declines
by increasing sales in its remaining business areas and planned availability
of Gateway products in retail.
Gateway exited the quarter with $932 million in cash and marketable
securities compared with $1.09 billion in the fourth quarter and $1.22 billion
in the first quarter of 2003. The decline from the previous quarter reflects
the impact of the merger, the quarter's operating loss and previously
announced restructuring and transformation costs.
Outlook
Gateway expects to be in line with current analyst estimates for second
quarter 2004 revenue of $798 million and a loss of 15 cents per share before
restructuring and transformation costs. The company is still assessing
second-quarter restructuring and transformation expenses. As previously
announced, Gateway expects to be profitable for 2005 and is targeting an SG&A
cost structure below 10% of revenues.
About Gateway
Since its founding in 1985, Gateway (NYSE: GTW) has been a technology and
direct-marketing pioneer, using its call centers and retail outlets to build
direct customer relationships. As a branded integrator of personalized
technology solutions, Gateway offers consumers, businesses and schools a wide
range of thin TVs, digital cameras, connected DVD players, enterprise systems
and other products, which work together seamlessly with its award-winning line
of PCs. Its products and services received nearly 130 awards and honors last
year. With its acquisition of eMachines now complete, Gateway is the third
largest PC company in the U.S. and among the top ten worldwide. Visit
http://www.gateway.com for more information.
Conference call information
Gateway will host a conference call for analysts on Thursday, April 29 at
5:30 pm EDT/2:30 pm PDT which will be accessible via live audio webcast at
http://www.gateway.com.
Certain non-GAAP financial information
This press release contains certain non-GAAP financial information,
including disclosure of the portion of the company's SG&A, gross margins and
net loss relating to, or affected by, certain restructuring charges,
transformation expenses and tax provisions. This non-GAAP financial
information is provided as supplementary information and is not an alternative
to GAAP. This non-GAAP financial information is used by management to analyze
the company's baseline performance before charges and expenses that are
considered by management to be outside of Gateway's core operating results,
notwithstanding the fact that such restructuring charges and transformation
expenses may be recurring. This non-GAAP information is among the primary
indicators management uses as a basis for evaluating Gateway's financial
performance as well as for forecasting of future periods. The presentation of
this additional information is not meant to be considered in isolation or as a
substitute for reported results determined in accordance with GAAP.
Special note
This press release contains forward-looking statements that involve risks
and uncertainties, as well as assumptions that, if they do not materialize or
prove incorrect, could cause Gateway's results to differ materially from those
expressed or implied by such forward-looking statements. All statements,
other than statements of historical fact, are statements that could be
forward-looking statements, including any projections or preliminary estimates
of earnings, revenues, or other financial items; any statements of plans,
strategies and objectives of management for future operations; any statements
regarding proposed new products, services or developments; any statements
regarding future economic conditions or performance; statements of belief and
any statement of assumptions underlying any of the foregoing. The risks that
contribute to the uncertain nature of these statements include, among others,
completion of preparation of final financial results for the first quarter of
2003 and resulting adjustments, competitive factors and pricing pressures,
including the impact of aggressive pricing cuts by larger competitors; general
conditions in the personal computing industry, including changes in overall
demand and average selling prices, shifts from desktops to mobile computing
products and information appliances and the impact of new microprocessors and
operating software; the ability to simplify the company's business, change its
distribution model and restructure its operations and cost structure;
component supply shortages; short product cycles; the ability to access new
technology; infrastructure requirements; risks of international business;
foreign currency fluctuations; risks relating to new or acquired businesses,
joint ventures and strategic alliances; risks related to financing customer
orders; changes in accounting rules; the impact of litigation and government
regulation generally; inventory risks due to shifts in market demand; the
impact of employee reductions and management changes and additions; and
general economic conditions, and other risks described from time to time in
Gateway's Securities and Exchange Commission periodic reports and filings.
Gateway assumes no obligation to update any forward-looking statements to
reflect events that occur or circumstances that exist after the date on which
they were made.
Gateway, Inc.
Preliminary Consolidated Condensed Statements of Operations (1)
(in thousands, except per share amounts)
(unaudited)
Three months ended March 31,
2004 2003
Net sales $868,383 $844,451
Cost of goods sold 754,054 738,217
Gross profit 114,329 106,234
Selling, general, and
administrative expenses 296,024 308,347
Operating loss (181,695) (202,113)
Other income, net 6,167 4,414
Loss before income taxes (175,528) (197,699)
Provision (benefit) for income taxes (12,785) --
Net loss $(162,743) $(197,699)
Preferred stock dividends and accretion (2,789) (2,782)
Net loss attributable to common
stockholders $(165,532) $(200,481)
Basic and diluted net loss per share $(0.49) $(0.62)
Basic and diluted weighted average
shares outstanding 335,399 324,072
Gateway, Inc.
Preliminary Consolidated Condensed Balance Sheets (1)
(in thousands)
(unaudited)
March 31, December 31,
2004 2003
ASSETS:
Current assets:
Cash and cash equivalents $317,859 $349,101
Marketable securities 613,954 739,936
Accounts receivable, net 331,248 210,151
Inventory 193,610 114,136
Other 264,804 250,153
Total current assets 1,721,475 1,663,477
Property, plant, and equipment, net 244,838 330,913
Intangibles, net 288,745 13,983
Other assets 21,631 20,065
$2,276,689 $2,028,438
LIABILITIES AND EQUITY:
Current liabilities
Accounts payable $579,314 $415,971
Accrued liabilities 291,092 277,455
Accrued royalties 35,809 48,488
Other current liabilities 249,332 257,090
Total current liabilities 1,155,547 999,004
Other long-term liabilities 150,403 109,696
Total liabilities 1,305,950 1,108,700
Series C preferred stock 198,298 197,720
Stockholders' equity 772,441 722,018
$2,276,689 $2,028,438
(1) The preliminary consolidated results for the three months ended
March 31, 2004 are subject to change. The Company is releasing
preliminary results for the first quarter pending the finalization
of certain tax provisions in connection with recent settlement
discussions with tax authorities and pending updates on certain
legal settlement obligations between now and the filing of the first
quarter 10-Q.
Gateway, Inc.
Analysis of Preliminary Consolidated Condensed Statement of Operations (1)
For the three months ended March 31, 2004
(in thousands, except per share amounts)
(unaudited)
Results of Restructuring Transformation
Operations Charges (2) Expenses (2)
Net sales $868,383 $-- $--
Cost of goods sold 754,054 4,905(3) 5,803(5)
Gross profit 114,329 (4,905) (5,803)
Selling, general, and
administrative expenses 296,024 75,876(4) 17,021(5)
Operating loss (181,695) (80,781) (22,824)
Other income, net 6,167 -- --
Loss before income taxes (175,528) (80,781) (22,824)
Benefit for income taxes (12,785) -- --
Net loss $(162,743) $(80,781) $(22,824)
Preferred stock dividends
and accretion (2,789) -- --
Net loss attributable
to common stockholders $(165,532) $(80,781) $(22,824)
Net loss per share $(0.49) $(0.24) $(0.07)
Results of
Operations, net of
Restructuring
Charges,
Transformation
Taxes (2) Expenses
and Taxes (2)
Net sales $-- $868,383
Cost of goods sold -- 743,346
Gross profit -- 125,037
Selling, general, and
administrative expenses -- 203,127
Operating loss -- (78,090)
Other income, net -- 6,167
Loss before income taxes -- (71,923)
Benefit for income taxes 12,785(6) --
Net loss $12,785 $(71,923)
Preferred stock dividends
and accretion -- (2,789)
Net loss attributable
to common stockholders $12,785 $(74,712)
Net loss per share $0.04 $(0.22)
(1) The preliminary consolidated results for the three months ended
March 31, 2004 are subject to change. The Company is releasing
preliminary results for the first quarter pending the finalization of
certain tax provisions in connection with recent settlement
discussions with tax authorities and pending updates on certain legal
settlement obligations between now and the filing of the first
quarter 10-Q.
(2) This non-GAAP financial information is provided as supplementary
information and is not an alternative to GAAP. The presentation of
this additional information is not meant to be considered in
isolation or as a substitute for results of operations presented in
accordance with GAAP.
(3) Represents costs related to the severance of employees and the
closure of facilities.
(4) Represents costs related to the closure of facilities and accelerated
depreciation, and the severance of employees.
(5) Represents outsourcing transition costs and other expenses related to
the Company's transformation.
(6) Represents an income tax benefit based on information received from
tax authorities.
Gateway, Inc.
Analysis of Consolidated Condensed Statement of Operations
For the three months ended March 31, 2003
(in thousands, except per share amounts)
(unaudited)
Results of
Operations, net
Results of Restructuring of Restructuring
Operations Charges (1) Charges (1)
Net sales $844,451 $-- $844,451
Cost of goods sold 738,217 12,758(2) 725,459
Gross profit 106,234 (12,758) 118,992
Selling, general, and
administrative expenses 308,347 65,048(3) 243,299
Operating loss (202,113) (77,806) (124,307)
Other income, net 4,414 -- 4,414
Loss before income
taxes (197,699) (77,806) (119,893)
Provision for income taxes -- -- --
Net loss $(197,699) $(77,806) $(119,893)
Preferred stock dividends
and accretion (2,782) -- (2,782)
Net loss attributable
to common stockholders $(200,481) $(77,806) $(122,675)
Net loss per share $(0.62) $(0.24) $(0.38)
(1) This non-GAAP financial information is provided as supplementary
information and is not an alternative to GAAP. The presentation of
this additional information is not meant to be considered in
isolation or as a substitute for results of operations presented in
accordance with GAAP.
(2) Represents costs related to the severance of employees, closure of
facilities and asset write-downs.
(3) Represents costs related to the closure of facilities, accelerated
depreciation and costs related to the severance of employees.
SOURCE Gateway, Inc.
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Related links:
http://www.gateway.com
Photo Notes:
NewsCom:
http://www.newscom.com/cgi-bin/prnh/20020930/LAM050LOGO
AP Archive: http://photoarchive.ap.org
PRN Photo Desk, photodesk@prnewswire.com
CONTACT:
media, Bob Sherwin, +1-858-848-3886,
robert.sherbin@gateway.com, or investors, Marlys Johnson,
+1-605-232-2709, marlys.johnson@gateway.com, both of Gateway,
Inc.
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