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Gateway cuts jobs, sees loss
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August 28, 2001: 6:28 p.m. ET
PC maker to trim 15 percent of staff, expects shortfall in third quarter
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NEW YORK (CNNfn) - Gateway Inc. said Tuesday said it will cut thousands of jobs and post a loss in the third quarter as it struggles through a protracted downturn in demand and falling prices for personal computers.
The San Diego-based PC maker said it will cut its U.S. work force by 15 percent and its worldwide work force by 25 percent. Gateway also said it may exit the European market altogether.
With the possible European exit, the job cuts would total about 4,600 out of its worldwide work force of about 19,000, a company spokeswoman said. Excluding Europe, the cuts would total about 3,500, she said. The restructuring is expected to save up to $300 million annually.
The company announced it was cutting more than 3,000 jobs in January after reporting fourth-quarter earnings that missed lowered forecasts on Wall Street.
Gateway (GTW: up $0.10 to $8.60, Research, Estimates) also said it expects to post a pretax loss in the third quarter, and a modest profit in the second half of the year, excluding one-time items. It said it would take a $475 million charge for the restructuring in the third quarter.
Prior to Tuesday's announcement, executives had forecast break-even results for the second half.
The job cuts are part of a broader restructuring plan the company laid out in a statement after the close of trading Tuesday. The smallest of the U.S.-based PC vendors, Gateway has been especially hard hit by a fierce pricing war as well as a sharp decline in demand. Its main competitors are Dell (DELL: down $0.40 to $22.65, Research, Estimates), the biggest PC maker, and Compaq (CPQ: up $0.05 to $13.32, Research, Estimates).
Gateway said it will concentrate on six lines of business: hardware; communications; applications; learning; financing; and services. The company said it will start reporting revenue and gross profit for each of these lines of business in the fourth quarter.
The company said it will sharpen its focus on these business lines in the United States and close all its company-owned operations in Malaysia, Singapore, Japan, Australia and New Zealand. It expects to make a definitive announcement regarding its European operations in the next 30 days.
In the United States, Gateway said it will close call centers in four states and a manufacturing plant in Utah.
"We're really just formalizing, internally and externally, these lines of business," Gateway Chairman and CEO Ted Waitt told analysts during a teleconference Tuesday evening.
The restructuring can be seen as a sort of re-birth of the "beyond-the-box" strategy that had been championed by Gateway's former CEO, Jeff Weitzen. Waitt replaced Weitzen as CEO last January as part of a broader management shakeup.
Under the "beyond-the-box" strategy, Gateway focused on more profitable businesses such as Internet access, training and other services as a means to offset the less profitable hardware business.
When he took over as CEO, Waitt had promised to return the company's focus to hardware, especially on so-called "information appliances," which are designed specifically for Internet access.
Earlier this month, Standard & Poor's lowered the company's debt rating to BBB- from BB, making it more difficult for Gateway to raise money as it struggles to return to profitability. S&P said the downgrade reflects tough industry conditions, Gateway's declining revenue base, and the company's expectation that it will not return to profitability until fiscal 2002.
As for the downgrade, which puts Gateway's debt in the speculative or "junk" category, Joe Burke, the company's chief financial officer, said Gateway has very little outstanding debt and pointed out that Moody's Investors Service, a competing rating agency, has a Baa2 rating on Gateway's debt, which is two notches above "junk" status.
"We don't completely understand the rationale for the magnitude of the downgrade," Burke said.
When Gateway reported its second-quarter results on July 19, executives had said they were considering "significant restructuring" of the company's worldwide operations. At the same time, they had said they expected the company to break even in the second half of 2001.
Gateway stock rose to $9 in after-hours trading after edging up to $8.60 in regular trading. 
-- Reuters contributed to this report.
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