Gateway: Bigger loss on the way

The PC maker warns that it will post a bigger loss in its third quarter than expected, blaming the 11 September hijacker attacks for a drop in demand
Written by John G.Spooner, Contributor

The stormy PC market claimed another victim Thursday, with Gateway cutting estimates for its third quarter.

Citing a drop in demand after the 11 September hijacker attacks, the beleaguered PC maker said it now expects to report a pretax loss of 14 cents to 17 cents a share, excluding charges, when it announces third-quarter results on 18 October. Earlier, the company had predicted a slight pretax loss, excluding charges.

A consensus of analysts was expecting a loss of 4 cents per share for the quarter, according to First Call.

Gateway said it still expects to return to profitability in the fourth quarter, but that it is unlikely to reach its previous break-even guidance for the second half.

During a conference call, Gateway chief executive Ted Waitt added that he expects a return to profitability despite the fact that October is seasonally the second slowest month in terms of sales.

The company plans to take an additional noncash charge of $100m to $130m in the third quarter related to declines in its investments.

"While virtually every segment of our business was adversely affected in the days and weeks following the tragic events of 11 September, we're starting to see business normalize again, and we're hopeful that we've seen the worst of the impact from those events," Waitt said in a statement.

Compaq issued a similar earnings warning Tuesday, with chief executive Michael Capellas blaming its problems on a "perfect storm," which included slower sales in the wake of the proposed merger with Hewlett-Packard and logistics problems caused by the 11 September terrorist attacks and the recent typhoon in Taiwan.

The 11 September attacks came during a critical month for PC manufacturers: September generally accounts for 50 percent to 70 percent of the quarter's sales.

Needham analyst Charles Wolf said that Gateway and Compaq probably felt the sting worse than other PC makers because the attacks came at the end of their quarters.

Wolf added that he expects the two companies to recover from the blow.

"Ted said that sales were normalizing. And because of that I expect them to be able to make those -- as they called it -- 'lost sales' back... Holiday sales will probably be relatively stronger than people expect," Wolf said.

Gateway has also been hit hard by the ongoing technology slump. The PC maker has closed overseas offices and manufacturing lines, announced layoffs of up to 25 percent of its worldwide work force, and shuttered a number of its Country stores.

The company has also made sure that others feel its pain. Gateway's decision last week to drop Advanced Micro Devices' processors from its PCs was considered a significant blow to the number two chipmaker.

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