Gateway 2000's business performance is suddenly as spotty as its bovine boxes. The mail-order computer-maker's sales aren't as strong as it had forecast - and its stock price took a nose-dive today after the company reported that its third-quarter earnings won't meet analysts' expectations. The news raised concerns that the company is losing its footing in an increasingly competitive market for direct PC sales.
Meanwhile, rival Dell Computer saw its shares rise in value as investors lined up behind the seeming winner - for now - in the mail-order slugfest.
The timing of Gateway's announcement appears to be connected with an analysts' get-together today and Thursday at Dell's Texas headquarters. Insiders say South Dakota-based Gateway had been invited to put together a presentation as well, seeing as everyone was going to be nearby, and the company reportedly declined the offer. One analyst said Gateway's evasive responses to requests for information sent out "bad vibes" to PC industry watchers.
In response, PaineWebber's Walter Winnitzki downgraded Gateway's shares today to "neutral" from "attractive." CS First Boston's Charles Wolf also downgraded Gateway's share value, and lowered his quarterly earnings projection for the company to just 10 cents a share.
Apparently sensing which way the wind was blowing, Gateway CEO Ted Waitt said this morning that the company had been "overly aggressive" in its sales projections for the quarter ending on 30 September. "We expect our unit shipments in the third quarter will still be up approximately 30 percent over last year," he noted, "but clearly we were looking to do better than that."
Many analysts had been predicting net income of 47 cents per share. In pouring cold water on that number, Gateway is hoping to get a head start on the doomsayers before making its actual results public. "When you fall short of your internal forecast two things happen," Waitt said. "Costs go up as a percentage of sales, and margins go down."
A third thing can happen as well, as Wall Street made clear today: your stock price can get hammered. Gateway is doing its best to depict its third-quarter results as a mere bump in the road, and not as a symptom of larger problems. It blamed part of its worse-than-expected performance on lower PC prices, and on delays caused by the UPS strike. Waitt said the company is "taking the necessary actions" to get itself back on track.
Such actions are all the more urgent in light of Dell's declaration last week that it plans to go for a bigger slice of the consumer market, branching out from its established corporate-sales stronghold. The company said it would create a new division to boost its consumer sales from the current US$1 billion a year, representing about 10 percent of the company's revenues. Gateway is just the opposite, reaping 90 percent of its take from consumer sales.
Dell has become the high-tech darling among investors. The company's stock is up - fasten your seat belts - more than 20,000 percent since 1990 as it sets the pace among low-inventory, direct-sale computer makers. Dell's ways have proven so successful that Compaq, IBM, and Hewlett-Packard have each said they too will get into the build-to-order business. Then there are the scads of smaller players - Mac clone maker Power Computing plans to debut its first Wintel machines next week - angling for whatever market share is left over.
Dell now claims to be the third-largest PC-maker after Compaq and IBM. The company's total sales have skyrocketed from about $159 million when it went public in 1988 to an estimated $12 billion this year. Net profits this year are expected to reach about $900 million.
Gateway has done almost as well in marketing its computers to tech-savvy consumers who no longer feel a need to kick the tires before making a purchase. But in focusing on home shoppers, the company has made few inroads into the more lucrative small-business and corporate markets, virtually conceding the field to Dell.
Market researcher Dataquest says direct-sales outfits like Gateway and Dell now account for about 18 percent of PC sales, compared with about 73 percent for resellers and retail outlets. But sales figures for both sectors are climbing at an almost even pace, suggesting that there's room for both channels as more people splurge on computers.
"Gateway is getting caught in a trap in terms of how it's been marketing itself," said Dataquest analyst James Staten, noting that the folksy, friendly image of Gateway's cow boxes won't do much in attracting business customers. "They really need to improve their sales to this market."
That's the rub. If Gateway can't herd its cows into the office, the company will see itself increasingly marginalized as a cut-rate supplier to home users. And that would be bad vibes indeed for the company's future prospects.
