Gateway dives into digital projectors

Gateway will unveil two new digital projectors sometime in Q2, which ends June 30. The company, which is currently the third largest personal computer maker in the US, is hoping to build interest in new products as a way to compensate for the loss in personal computer sales.

Gateway has racked up sizable losses over the last two years. The firm has seen its share of the PC business dwindle as the two largest players, Dell Computer [DELL: Nasdaq] and Hewlett-Packard [HPQ: NYSE], continue to muscle the smaller providers out of the market. In fact, with business too slack to absorb Gateways costs, the company recently warned on its Q2 estimates.

Analysts surveyed by Thomson First Call called for the company to post a loss of $0.34 per share, but the range given by Gateway is almost double that at $0.62 and $0.66 per share. Despite the mounting losses, Gateways goal is to return to profitability by Q4 of 2003. We continue to believe this goal to be too optimistic and fear that Gateway may back down from this promise. The stock has factored in such disappointments, given that it is trading for about $1 less than its cash value per share. We theorize that the best option for the company would be to allow itself to be acquired by another manufacturer. However, given that management is not considering this option and business remains weak, our rating stands at a Sell

An outside vendor will handle the manufacturing duties for the two new Gateway-branded projectors. The new items, Gateway Model 205 SVGA and the Gateway Model 210 XGA, are aimed at the small-to-medium sized business and education markets. The projectors each weigh 3.5 lbs and are about 2-1/2 inches thick, the dimensions of a medium-sized book.

The announcement came on the heels of Gateways decision for a third restructuring in three years. As part of its plan to reduce expenses, the company plans to eliminate about 17% of its workforce and close 76 of its under performing retail stores. This latest restructuring is set to save the company about $400m annually. While the move is bold, it is a necessary step to stem the tide of losses the company has suffered over the last couple of years. As a result of the layoffs and the store closings, the company is expected to take a Q1 charge of between $75m and $80m. Gateway said it expects the cash component of these costs to be approximately $10m this quarter and about $30m to $35m spread over subsequent quarters.

Gateways maneuvers to restructure its business and to steer it increasingly towards the retailing of digital products should provide some immediate relief. The company is hoping that the moves will coincide with a pick-up in PC demand and that the company will close out the year in good shape. Furthermore, what would be needed to ensure this scenario is the return of the US economy to good health. Unfortunately, we predict that it will take at least another four quarters from now for the economy to kick into motion. While the company has adequate funds to ride out the turbulence, no investor is interested in tying their fortunes to that of a sinking ship.


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