The PC maker’s founder and CEO redux says Gateway’s salvation lies in providing ,beyond-the-box, services.
By Steven Brull
October 2001
Institutional Investor Magazine
Even before the horrific attacks on the World Trade Center, which seem likely to push the U.S. into recession, this had been a poor year for Gateway, the nation’s fourth-largest PC maker. Hewlett-Packard Co.'s proposed merger with Compaq Computer Corp. looks set to create a new industry behemoth, prompting speculation that Gateway could be the next to disappear.
Conditions in the PC market are now even grimmer. After 15 consecutive years of growth, sales of PCs have begun to contract. U.S. shipments are expected to slide 6.2 percent, to 44.8 million units this year, with sales to consumers dropping 22 percent, according to Gartner Dataquest, an industry research firm. Gateway is especially vulnerable because it sells mainly to the always price-sensitive - and now shaken - consumer segment of the market.
In the first half of 2001, Gateway lost $500 million on sales of $3.5 billion, down 23 percent from the same period a year ago. The company’s shares have plummeted more than 90 percent over the past 12 months, to about $6.00.
For Gateway’s co-founder Ted Waitt, who owns about 100 million shares, or about 30 percent of the company, the slide has been especially painful. His personal wealth has melted by $7 billion - give or take a few hundred million.
That collapse spurred the ponytailed 38-year-old into action. Gateway’s workforce was slashed by10 percent. In January Waitt returned as CEO, ousting his handpicked successor, Jeffrey Weitzen, an AT&T Corp. alum. Gateway shares got a one-day bounce, then resumed their downward slide.
By August Waitt had decided to scale back the company’s international ambitions and return to basics. The company will exit Europe and Asia, regions that contributed one eighth of the company’s second-quarter revenue, and reduce its workforce by a further 25 percent. There will also be a renewed effort to sell a host of “beyond-the-box” services - from home networks to broadband connectivity to PC training. In the second quarter such value-added businesses made up 17 percent of Gateway’s sales but contributed 42 percent of the company’s gross profit.
The August restructuring will save $300 million annually and result in $475 million in third-quarter special charges. Gateway hopes to eke out a small pretax profit for this year’s second half. Analysts peg full-year sales at about $6.4 billion, with losses of $6.5 million. In 2000 Gateway reported net income of $253 million on sales of $9.6 billion.
Many analysts doubt Gateway can survive as an independent enterprise. Its U.S. market share is 7.4 percent, compared with 36.5 percent for a combined HP-Compaq and 23.6 percent for Dell Computer Corp., according to Gartner. “Gateway management is dressing up the company for sale,” reckons Merrill Lynch & Co. analyst Steven Fortuna.
Taking a break from shooting a TV commercial, the ever-ebullient Waitt discussed Gateway’s plans with Institutional Investor Senior Editor Steven Brull.
Institutional Investor: How will Gateway be affected by the proposed Hewlett-Packard-Compaq merger?
Waitt: I’m not at all worried. I view the merger more as an opportunity for us because they’ll be distracted trying to integrate two monster companies. They haven’t even integrated some of the acquisitions they’ve made recently.
What about the economies of scale?
In this industry you’re much better off being fast-moving, nimble, quick. We’ve got resources and the right brand. I’d feel better if the merger goes through than if it doesn’t.
But if the companies merge, the new HP, plus Dell and IBM, would have more than half the U.S. PC market. Wouldn’t that marginalize Gateway?
I definitely don’t think so. First of all, what are the chances they’ll maintain all their market share while they’re going through this huge transition? On the retail side, where we compete most, it’s pretty clear the Compaq brand is going away. So retailers are going to want another supplier. And it will be difficult for [HP-Compaq] to maintain their small-business share. You can make the case that they shrink a little, then we move up.
Will Gateway be the next to be sold?
I say, Why? That is definitely not a course of action that we’re pursuing.
In 1997 you nearly sold Gateway to Compaq. But you backed out because you wanted to run the show. Has your attitude changed?
My management philosophies have probably matured a little bit. But I’ve never regretted that decision. I feel really good today being a small $6 billion independent company. We’ve got a billion dollars in cash. I don’t see how anybody could make the case, particularly given where our valuation is, that it would be a good thing for customers, shareholders or employees [to sell the company].
Why was it so important for you to take over again as CEO of Gateway?
Who else was going to do it? I was available. I was unemployed. . . .
They weren’t lining up at the door to take on the challenge?
No. And I knew the company inside and out.
Looking back, what would you have done differently as a manager?
I would have been more aggressive in pushing to reengineer the underlying business. All of our beyond-the-box capability was built on top of an old engine that was basically made to manufacture PCs.
In withdrawing from offshore markets, particularly Europe, isn’t Gateway mortgaging its future?
We had to face a couple of facts. Outside the U.S. we’re primarily just a hardware supplier. We didn’t have the partnerships to be a solutions provider. We didn’t have a strong brand. We didn’t have the distribution like we have in our stores here. So to try and fight the battle over here and build a business over there seemed like not a prudent thing to do.
Will you ever reenter Europe or Asia?
We have not written off the possibility at all. We’re exploring some options to leverage the assets that we have, such as our brand. Two or three years down the road, we’ll be ready to go in, but our strategy will be based on smaller geographic territories. We’d go into London, Tokyo or Paris - rather than saying, We’re going to be in all of Europe.
Your new strategy seems pretty much the same as your old one.
Yes, our strategy at the highest level - to deliver solutions, to be the IT department for the masses - is still the same. But now it’s really a complete solutions strategy. We’re focused on delivering a complete solution rather than being a box company that also has a beyond-the-box business. We’re focusing particularly on broadband, home and small-business networking.
Investors haven’t been cheering.
If I were at sea right now and read the press, I’d say, Oh, the game is over. But the environment I see is very much akin to when we first got into the PC business. In those days you had two choices: buy an IBM and pay a huge premium at Computerland, or buy the chassis, the processor, the hard drive, the monitor and so on and build it yourself. Today it’s the communications, the installation services, the training and the applications that sit on top.
Give us an example of what you mean.
You could merge databases of our partners - say a broadband supplier, a financial supplier and somebody like an AOL - to find candidates for a broadband line and a home network. You get the lead, you take an appointment for a technology consultation, and you sell a solution.
But there’s lots of competition in broadband and home networking.
They’re all trying to get pieces of the market, but nobody has the full integrated solution. If you’re a customer and you want a broadband line, a home network, a couple of PCs, you want them hooked up and installed. You want to be downloading music, paying your bills and doing online pictures. Then you’d like a training class and somebody to come to your house every three months to make sure everything’s working and show you some new things. You want that relationship with one company.
What’s the biggest risk going forward?
Our challenges are purely based on our ability to execute our strategy.
