PC direct seller Gateway has historically looked forward to a strong start to the holiday selling season, but that didn't happen this year. Now the company not only forecasts a disappointing fourth quarter but upcoming year as well.
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Direct PC seller Gateway (NYSE: GTW) moved back slightly in today's trading, but the real damage came in tonight's after-hours session as the company turned in an after-the-bell earnings warning. Disappointing holiday season consumer sales are seen driving revenue of approximately $2.55 billion for the fourth quarter, about flat with last year and $500 million below previous estimates. Gateway now expects operating income of at least $0.37 per share, which would be $0.25 below analyst consensus estimates. A one-time charge of approximately $200 million, or $0.39 per share, in connection with the write-down of technology-based investments and other assets will pull quarterly EPS down to $0.02 assuming no subsequent upgrade to the company's guidance. "We expect consumer sales to continue ramping up this quarter," said CFO John Todd in a press release, "but it is now obvious to us following the Thanksgiving weekend that they will not grow sufficiently to allow us to meet previous consensus for EPS and guidance for revenue. The economic slowdown, coupled with on-going shifts in PC seasonality, clearly had a significant impact on our sales over the holiday weekend." Todd said Gateway expects continued pressure on overall demand over the next 12 to 18 months. The company directed investors toward EPS of $1.89 for full-year 2001, down from previous consensus estimates of $2.28. "We also believe we have the right strategy, and are executing well against it," said CEO Jeff Weitzen in a statement. "We remain confident that we're on the right track and that we will continue to distance ourselves from traditional competitors in 2001. We also believe we are well positioned to benefit from the coming convergence of broadband access, content, communication and devices." On a conference call, Gateway executives echoed this sentiment in discussing the continued evolution of the company's business model toward "beyond-the-box," non-PC income streams. Q4 provides a stark illustration of the importance of that direction: PC revenue is expected to fall 9% year-over-year in the last three months of 2000, while beyond-the-box revenue (at Gateway, that means Internet appliances, bundled hardware, software and services) is seen doubling. Next year PC revenue growth is expected to be flat, while beyond-the-box growth will be counted on to drive the lion's share of the projected 10% topline expansion and 18% EPS growth. Dell (Nasdaq: DELL) and Apple Computer (Nasdaq: AAPL) also moved back in today's session. A note from Merrill Lynch analyst Steven Fortuna may have precipitated the intraday action, as he made an eerily prescient call about Gateway's Thanksgiving weekend -- even, it seems, predicting that the company might issue a sales warning in advance of tomorrow's planned presentation at this week's Credit Suisse First Boston technology conference. This is disappointing news for Gateway and its investors, who enjoyed a solid Q3 and typically look toward a strong close to the year. Still, given recent disappointing releases from many of technology's top names -- Apple, Dell, and Intel (Nasdaq: INTC) among them -- investors probably could have seen this one coming. Indeed, the company's shares weren't on track to finish 2000 with a bang, and the company now sits very squarely among its distressed peers.
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