In the first quarter of 2001, Gateway posted sales of $2.03 billion, a 15 percent decline over the same period last year, and had a net loss of $503 million, or $1.56 per diluted share, including the pre-tax effects of $533 million of special charges, as well as the $24 million cumulative effect of implementing a new accounting principle. During the same period last year, the company had net income of $120 million, or $0.36 per diluted share.
We’re making solid progress against our revitalization plans, said Ted Waitt, Gateway chairman and chief executive officer. In order to get our business in fighting form for the second half of 2001, we’re moving with speed and aggressiveness to make the appropriate operational improvements to our business now. I’m confident that with the steps we’re taking, we’ll emerge a much stronger and more profitable company and will exit the current quarter with some solid momentum across our business.
During the first quarter, Gateway sold 1.1 million units worldwide, down 12 percent year over year and down 14 percent from the fourth quarter of 2000. Gateway’s U.S. Consumer unit saw revenues decline 19 percent year over year in the quarter, while its U.S. Business unit posted a 6 percent increase in revenues, with a notable 13 percent increase in sales to small and medium businesses over the prior year.
In Gateway’s international operations, the company’s European operations posted a 38 percent decline in revenues for the quarter over the same period last year, with its Asia-Pacific group posting a 32 percent decline.
Revenue was impacted in the quarter and will be impacted in future quarters by actions being taken to eliminate certain less-profitable revenue streams. These actions include, among other things, the closure of under- performing retail locations, a rationalization of international markets, elimination of most indirect sales efforts, a modification of the company’s ISP business model and the decision to discontinue the purchase of lesser- quality consumer finance receivables, outlined below.
We’re taking advantage of the current demand environment to take the necessary steps to get our business back in shape for the second half of the year, Waitt said. While our revenue performance in the quarter was negatively impacted by our own strategic decision to focus on more profitable revenue streams going forward, this is a strategy that should yield healthier shareholder returns both now and in the future. Going forward, we intend to capture more than our fair share of the market by offering unbeatable value and the best customer service and support in the industry. In fact, our early efforts are showing signs of gaining traction in those two areas.
In the past six weeks, the company has taken steps to price more competitively and is in the process of repositioning its marketing efforts to drive more traffic to its existing Gateway Country stores in the U.S., which serves both the Consumer and Business sales organizations. In addition, the company has taken a number of steps to increase customer satisfaction, from retraining its sales force to eliminating tech support policies that previously had a negative effect on the company’s overall customer experience. As a result, Gateway’s internal tracking measurements show that customer satisfaction scores increased nearly 15 percent in the month of March alone, to their highest levels in the more than two years the company has been tracking such results.
In an effort to provide better visibility to the sale of non-PC products and services, which Gateway has called beyond-the-box sales, the company will now begin to report the sale of beyond-the-box items both at the point of sale, and after the sale. Therefore, Gateway will now begin to report an average selling price (ASP) metric, which is the sum of the PC and non-PC products and services purchased with the PC at the point of sale. In the first quarter, the ASP was $1,723.
Total beyond-the-box sales amounted to 23 percent of revenue and 41 percent of gross profit in the first quarter, versus 14 and 29 percent respectively for the same period last year. Approximately $326 million of the beyond-the-box revenue in the first quarter occurred at the point of sale and is accordingly included in the ASP calculation, while $141 million was from after the point of sale.
Beyond-the-box remains a critical element of profitable growth for Gateway, and is a cornerstone of our commitment to lifelong relationships with our customers, Waitt said. By breaking out beyond-the-box sales in this new way, we’ll better illustrate the nature of this important stream of revenue and profit both at the point of sale and beyond.
In the first quarter, Gateway began restructuring the business to improve its position. As a result, the company recorded $533 million of special charges, consisting of $250 million of charges relating to restructuring steps previously announced and estimated to be in this range in late February, and the balance primarily related to subsequent strategic decisions concerning the technology and other assets acquired from NECX Direct and the company’s consumer loan portfolio.
Approximately $430 million of the $533 million charges are non-cash.
Special charges for previously announced restructuring steps consisted of $39 million to cover productivity initiatives following the previously announced 12 percent reduction in force and the departure of senior executives; an $83 million write-down covering domestic facilities and capital assets; $75 million for the closing of underperforming retail locations in the U.S. and Canada; $38 million for restructuring of international operations and $15 million for other items. Subsequent strategic decisions included an IT systems restructuring of the company’s e-commerce operations, primarily Gateway’s online peripherals store. This resulted in the abandonment of the intellectual property and technology acquired in the NECX acquisition and the write-down of the remaining $140 million of goodwill and other intangibles associated with that acquisition.
In addition, while the company will continue to offer customer financing, it decided to discontinue providing customer financing to lesser quality credits, and to sell the substantial balance of its existing consumer loan portfolio consisting of these credits. Therefore, the company took a $100 million charge in the first quarter to write-down its loan portfolio to estimated realizable value. Earlier this year, the company sold approximately $500 million of its portfolio, consisting of higher-tiered credits, at par.
Gross profit margin for the quarter was 9.7 percent. Excluding the effects of Gateway’s consumer loan portfolio and special charges, gross profit margin would have been 18.5 percent for the first quarter of this year while it was 21.6 percent for the same period last year.
