eMachines issues profit warning as demand sinks

Sinking demand for consumer PCs poses a serious problem for eMachines
Written by Larry Dignan, Contributor

EMachines said Monday its second quarter earnings will fall significantly short of Wall Street estimates as consumer PC demand fell.

The company, which offers low-priced computer systems, said it will report second quarter loss of 30 cents a share to 33 cents a share, excluding charges. Sales will be in the $115m to $125m range. Earnings tracking firm First Call projected a loss of a penny a share.

EMachines shares hit a 52-week low of 3 7/8 in early trading. Shares of eMachines had a rough outing in a March IPO and never recovered.

The second quarter ending 1 July was expected to be seasonally slow, but eMachines said PC consumer demand has dwindled. EMachines, which plays in the volume-driven low-cost PC sector, reported a surprise profit in its first quarter as a public company.

Stephen A Dukker, CEO of eMachines, said demand "has been significantly below market expectations." Dukker blamed concerns about interest rates, the economy and stock market volatility for the drop in demand. The implication was clear -- when consumers are worried about cash, PC purchases are among the first to be cut.

"Several of our top retail accounts recently have announced that their sales of personal computers as well as other technology and big-ticket items are down," said Dukker, in a statement.

EMachines said it has an inventory glut and has had to discount heavily. The company indicated it gained some market share, but couldn't profit from the gains. EMachines also sees problems in the third quarter as consumers hold out for new products amid inventory problems and heavy discounting.

If Dukker's assessment is correct, other consumer-focused PC vendors such as Gateway and Compaq could also see problems on the low-end of the market. However, the slowdown may be open to debate. Some analysts argue that eMachines plays in a commodity market.

Lehman Brothers has been bullish on Gateway and other vendors that offer high-end systems to offset a slow demand for cheap PCs.

On Friday, Lehman upped estimates on Micron Electronics because the company has been able to avoid weak demand "due to their higher-performance consumer products."

EMachines also competes with Hewlett-Packard, Dell and Apple Computer on some fronts.

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