Gateway Inc, the second-largest direct seller of personal computers, plans to fire about 5,000 employees, or 25 percent of its workforce, as part of a plan to revive profit by halting business in Asia and possibly Europe. The company's shares rose as much as 9.3 percent on Tuesday.
Gateway will take US$475 million in third-quarter charges and forecast a loss for the period. The San Diego-based company expects to be profitable before taxes in the fourth quarter.
PHOTO: AP
The company, which now has 20,000 workers, said the plan will save US$300 million a year.
The PC maker has reported three straight quarterly losses as demand slumped and Dell Computer Corp, Gateway's biggest rival, cut prices. Gateway has said it would have been profitable in the second quarter without its business outside the US. The company will close a Salt Lake City plant plus all company-owned operations in Malaysia, Singapore, Japan, Australia and New Zealand and will disclose plans for Europe within 30 days.
"The opportunities are here in the US," Ted Waitt, Gateway's founder and chief executive, said. "We don't have to be a global business to succeed. We know we can succeed in the US. There's always a chance" of keeping Gateway's business open in Europe, he said.
"You have to look at the reality of the situation," he said. "It's difficult to execute our strategy."
Gateway shares rose as high as US$9.40 in after-hours trading following the announcement. They rose US$10 to US$8.60 in regular trading before the release. The stock has fallen 87 percent in the past year.
The company expects to have US$1 billion in cash and marketable securities by the end of the year. For the second quarter ended June 30, Gateway reported US$1.03 billion in cash and marketable securities.
Standard & Poor's Corp last week lowered Gateway's credit ratings to junk status, "BB," from "BBB-." The shares fell 12 percent the following day.
"Liquidity is not a problem," said Dan Niles, an analyst with Lehman Brothers who owns no shares in Gateway. "The market reacted negatively for no apparent reason."
Chief Financial Officer Joe Burke said Gateway doesn't have much debt and said Moody's Investors Service has kept it at an investment-grade rating.
Gateway said that excluding charges, it expects to be "marginally profitable" in the second half of this year. Analysts predicted a loss of US$0.01 a share in the third quarter and a profit of US$0.03 in the fourth quarter, according to Thomson Financial/First Call.
"It's not a disaster," Niles said. "It could have been a lot worse. It will be a couple of quarters before we get a sense of the operations."
Besides a plant and European headquarters in Ireland, Gateway has 18 retail stores in Europe. Its 36 stores in Asia and a plant in Malaysia will be closed. Its 18 stores in Australia and New Zealand have closed. Gateway last year had sales of US$1.36 billion in Asian and European markets.
Outside the US, Gateway didn't have adequate distribution channels, its brand wasn't well-known and it was difficult to work with foreign partners, Waitt said.
Waitt, 38, returned as Gateway's CEO in January after a year's absence. He fired his hand-picked successor, Jeff Weitzen, and six other executives after sales and profit began to slide.
The firings announced include eliminating 15 percent of Gateway's US workforce, or 2,625 employees. About 219 Gateway employees in Australia and New Zealand were fired, the company said in statement. About 400 people who worked at its Melaka manufacturing facility in Malaysia were fired and another 28 based in Singapore, Gateway said.
Gateway said it will close call centers in Hampton, Virginia; Vermillion, South Dakota; Lake Forest, California; and Salt Lake City. The company will keep open call centers in Sioux Falls and North Sioux City, South Dakota; Kansas City, Missouri; Rio Rancho, New Mexico; and Colorado Springs, Colorado. There won't be any firings in Gateway plants in North Sioux City, South Dakota, Waitt said.
Gateway said it's realigning into six business lines.
Besides PCs, they will include communications, applications, learning, financing and services. Gateway said it will begin reporting revenue and gross profit for each in the fourth quarter.
Gateway has offered those services for more than a year as part of its strategy, called "Beyond the Box,'' to sell products with higher margins than PCs.
"They've always been focused on those six areas," Niles said. "It isn't new stuff." The new model will enable the company eventually to have a 7 percent operating margin, Waitt said on a conference call.
"The question is when," he said.
Gateway averaged a 6.1 percent operating margin in the five years prior to 2001.
CFO Burke said the company is aiming for 7 percent by the second half of next year.
The non-PC lines have revenue of about US$120 billion and PCs add another US$100 billion, Waitt said.
"We're going after a much bigger pie than we've gone after before," Waitt said.
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