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Gateway Cuts 1,500 Jobs, Posts Q1 Loss

Poway, Calif. — The on-going restructuring that Gateway is conducting in the wake of its acquisition of eMachines resulted in 1,500 additional layoffs the company announced yesterday, but the eMachines merger also helped Gateway increase first quarter sales and narrow its loss for that period.

Gateway’s financial results for its first quarterly filing since company closed its 188 retail stores and acquired eMachines showed a 2.8 percent sales increase and a narrowing loss.

Gateway sales, for the three months ended March 31, hit $868.4 million, but include the operations of eMachines from March 12, when the acquisition was completed. Net loss for the first quarter reached $162.7 million, compared with a net loss of $197.7 million in the year-ago period. On a standalone basis, eMachines was profitable in the first quarter, said Gateway.

The Gateway loss, which includes restructuring charges and transformation expenses of $104 million and a tax benefit of $13 million, is part of a filing that Gateway calls “preliminary,” and subject to change in order to possibly reflect settlement of certain tax and legal issues. Excluding charges and expenses, the Gateway loss was $75 million, said the company.

At the same time, Gateway announced the elimination of 1,500 jobs, which followed a cut of 2,500 jobs when the retailer closed its stores in March. The company said it would end the year with about 2,000 employees, compared with about 3,500 following its store shutdown.

“We are in the midst of a far-reaching effort to simplify our business and fundamentally change our cost structure as we push toward a return to sustained profitability,” said Wayne Inouye, CEO.

The simplified business structure will have Gateway selling premium-brand PCs and consumer electronics, and eMachines value-brand PCs. Gateway called the CE products a premium alternative to lesser-known, low-cost brands.

“We are in strategic discussions with our retailer partners [including Best Buy and Circuit City, Inouye indicated]. We’re encouraged by the discussions and expect to have a strong channel presence, at least by the fourth quarter, [although] our target is to be in the channel by the back-to-school period.”

In the first quarter, Gateway CE revenue, alone, reached $94 million, a 180 percent increase year-over-year, but down 8 percent sequentially as a result of normal seasonal fluctuations. CE revenue as a percentage of total first quarter sales was 11 percent, up 4 percent from a year ago, but down 12 percent from the fourth quarter of last year. Gateway CE products range from flat-panel televisions and digital cameras to connected DVD players.

Gateway posted CE/non-PC revenue of $260 million, up 30 percent year-on-year, but down 3 percent from the preceding quarter. CE/non-PC revenue as a percentage of first quarter sales was 30 percent, down from 24 percent a year earlier and 31 percent from the preceding three months.

Gross margin in the first quarter hit 13.2 percent, including a 1.2 percentage point impact from restructuring and transformation expenses, compared with 15 percent in the first quarter of 2003. First quarter expenses increased to $296 million, down from $308 million year-on-year. The quarter included $93 million in costs, while the year-ago three months included $65 million.

In the full year, Gateway anticipates restructuring and transformation costs of $400 million to $450 million, while the closure of the stores is expected to impact future revenue by about $300 million per quarter and reduce expenses by about $60 million per quarter. Revenue decline is expected to be offset by increasing sales in remaining business areas and planned availability of Gateway products at retail.

Gateway is anticipating second quarter revenue of $789 million, and expects to be profitable in 2005.