Gateway, Time To Cut Costs (GTW)

| About: Gateway Inc. (GTW)

Gateway (GTW) is actually in better shape now than it has been in a couple of years. Leaving aside the departure of its CEO and recent downward revision in earnings for Q4 05, the company has shown a pulse with an increase in PC sales in the fourth quarter to 1,359,000 units and retail PC revenue up 32% over the previous quarter and 31% over the same period last year. Professional sales (to businesses) slumped. Cash and cash equivalents were $586 million.

Clearly, Gateway is going to have to improve the way it markets to businesses. The margins for selling at retail are brutal, and that is not likely to change.

But the most important issue at Gateway is still expenses. In 2005, the company was a breakeven operation on almost $3.9 billion in revenue. PC unit sales were up 27% over 2004, so the lack of a profit is especially troubling. The company had a gross profit of $339 million for 2005. That's all it has to work with against its costs. And, the PC market is not likely to grow like a weed over the next couple of years. Of course, Gateway has plenty of competition in bigger companies with better balance sheets like Dell (DELL) and HP (HPQ).

Taking another 10% out of the cost base, combined with even modest growth, turns Gateway into a reasonably good investment prospect, which it is not today. This is going to be especially hard given the huge amount of expense reduction that has already been done. But it's necessary if this stock is going to see $6 or $7 again.

Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He has also been president of when it was the 10th most visited site on the internet, according to MediaMetrix, and chief executive of On2 Technologies, Inc. and FutureSource LLC.

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