It's Wayne Inouye's Way at Gateway

The new CEO is applying his eMachines' cost-cutting and retail formula to the ailing PC company. That could be its best hope

By Sarah Lacy

These are trying times at venerable computer maker Gateway (GTW ). It remains stuck in the red, with a market share half what it was at its peak five years ago. But four months after Gateway's merger with eMachines, CEO Wayne Inouye is delivering on his reputation as both a cost-cutter and a dealmaker.

On Aug. 16, the Poway (Calif.) company confirmed another round of layoffs, this time at operations in Kansas City and Sioux City, S.D. A spokesman wouldn't give the exact number, saying the figure would be released at the end of the quarter. He was willing to confirm that at least several hundred jobs were eliminated. As of June 30, its second quarter, Gateway said it had 3,400 employees, down from 8,500 a year earlier. And it said it expected total headcount to be around 2,000 by yearend.

Along with the new layoffs, however, Gateway also announced that CompUSA will start selling its desktops and notebooks in its 227 retail stores. Taken together, the deal and the job cuts were welcome news on Wall Street, hinting that Gateway may actually be reaping the benefits of the strategies that made eMachines a profitable company for nine consecutive quarters. Gateway stock rose on the news, closing up 8.73%, to $4.11, on Aug. 16.


  The CompUSA deal is significant not only because it represents greater revenue potential but also because it proves that Inouye can close deals beyond Best Buy (BBY ), where he worked as senior vice-president in computer merchandising before taking the top job at eMachines in 2001. Gateway has already signed several agreements with Best Buy since the merger: One to sell inventory left over when Gateway shuttered its own 188 stores in April, one to sell new Gateways notebooks and desktops, and another to stock shelves with Gateway computers in Best Buy stores in Canada, as well as Future Shops, a Canadian retail outlet also owned by the chain.

The latest job cuts are likely to come in old manufacturing and customer-service operations, which will now probably be outsourced. But Gateway says it's also looking at departments like human resources for additional slimming. The goal is to get marketing, sales, and administrative costs down to the lean 4% of sales eMachines had enjoyed pre-merger, according to analysts. Gateway won't give a specific number but says it wants the percentage in "single digits." Gateway's ratio had been at about 27% and is now in the mid-teens, according to Roger Kay, technology analyst at IDC. By comparison, Dell (DELL ) has a ratio of about 9%.

Having a larger retail presence should help stop Gateway's market share slide, especially since more retail announcements are expected in coming months, analysts say. Right now, Gateway's share for notebooks, desktops, and low-end servers stands at 5.3%, ranking fourth behind IBM (IBM ), Hewlett-Packard (HPQ ), and Dell, according to IDC. That's down substantially from Gateway's 10.6% market share at the end of 1999.

The company hopes to be in the black sometime in early 2005. In July, Gateway reported a $338.6 million loss, its 10th straight money-losing quarter. Company watchers will soon get a sense of whether Inouye's talents extend beyond handing out pink slips and wooing the big chains.

Lacy is a reporter for BusinessWeek Online in Silicon Valley

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