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Gateway lives to see another day
Investor reaction to their announcement was mixed for good reason: Trouble spots in its financials.
November 5, 2004: 3:17 PM EST
By Eric Hellweg, CNN/Money contributing columnist

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BOSTON (CNN/Money) - As far as streaks go, 11 straight quarters is a pretty long time, especially when it's 11 straight quarters of a company reporting a loss. Such was the sad case for Gateway until Oct. 28, when it reported its first pro forma profit in nearly three years.

I know, I know -- pro forma. Trips me up too, because it harks back to the miragelike earnings reports filed by dot-coms.

But in Gateway's (Research) case, I think it's fair to use those numbers when assessing the company's fiscal health. On a GAAP basis, it reported a narrowed net loss of $59 million, or 16 cents per share.

If you strip away some of the last restructuring, transformation, and integration costs that remain from Gateway's merger with eMachines, the company actually reported a $4 million profit for the quarter.

Gateway's reported $915 million in revenue is still a ways off from its goal of reaching $1 billion in revenue per quarter. The total was also lower than the consensus estimates that analysts sought, and as a result the stock is trading lower this week. Look inside those revenue numbers and I think you'll see further reason for concern.

Red flags

One of the biggest red flags is Gateway's performance in the corporate/government/education sector, which accounts for more than a third of its total revenue.

"Q3 is normally a seasonally stronger quarter for government and education sales," writes Richard Gardner, an analyst with Citigroup Smith Barney, in a recent report. "This suggests Gateway continues to lose share in this segment to lower cost competitors."

CEO Wayne Inouye says he has done what he promised in the retail sector. Revenue there is up 33 percent from the previous quarter, thanks in large part to Inouye's retail experience and deals he was able to forge with retailers such as Best Buy (Inouye's alma mater), CompUSA, and Office Depot.

While the company doesn't provide any year-ago figures for comparison, its financials show that Gateway still struggles to use its capital effectively. Gateway requires about 9 cents of working capital for each dollar of sales, while Dell needs only a penny.

Cozy with retail

Although the company's cash crunch is abating as Gateway continues to reduce overhead, it still poses a threat to investors, as does Gateway's strong reliance on the retail sector. The best that can be said there is that retailers need companies like Gateway.

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"We're at a unique period in [retail] history" says Roger Kay, head PC analyst with IDC. "Retail is more anxious for partners right now than partners are for retail."

But I think Gateway investors are faced with two realities for Gateway's fourth-quarter earnings call. If the company's retail numbers slip or miss consensus estimates again, I believe the stock will be in free fall.

If Gateway nails its next quarter, however, I don't envision an equal, opposite reaction -- just a small, steady upside. As a result, if you're a Gateway investor, you're either long on the company or you're suicidal.


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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.