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Gateway Swings To Profit, But Plans Further Cost Cuts, Layoffs

Computer maker Gateway said it planned to cut $20 million to $25 million in expenses and lay off more employees despite a tax benefit that helped the struggling computer maker turn a profit in the fourth quarter.

The company reported net income of $8.8 million, or 2 cents a share, which included a tax gain of $11.8 million. A year earlier, Gateway posted a loss of $20.9 million, or 5 cents a share. Analysts polled by Thomson Financial were looking for earnings of 2 cents a share.

Revenue for the October-December period declined 9% to $1.02 billion from $1.12 billion last year and fell short of Wall Street's estimate of $1.05 billion.

Last quarter, company officials announced cuts of $30 million to $35 million and nearly 100 jobs after declining revenue and flat PC sales. They declined to say Thursday how many more layoffs were planned.

"It's apparent we've had an unaffordable expense structure," Chief Executive Office Ed Coleman said.

Coleman added that some of the fourth-quarter gross margin decline was the result of "poor execution and the incurring of incremental costs to make up for it."

Gateway said problems with a key supplier of hard drives lowered profit margins and price increases for panels and memory led to lower-than-expected gross margins in its professional and consumer direct businesses.

Unit sales of personal computers fell 5% to 1.29 million, giving the company a 6.6% share of the U.S. market.

The launch of Microsoft's new operating system, Vista, also affected revenue as retailers cleared out their inventory in anticipation of last month's launch, said John Goldsberry, senior vice president and chief financial officer. The company, however, expects a boost in sales in the first quarter as consumers buy Vista-equipped PCs, he said.

Company officials said they would also focus on sales to education, health care and government and increase emphasis on consumer-direct marketing.

For the year, net profit edged up to $6.9 million, or 2 cents a share, and revenue rose 3% to $3.98 billion. Total PC unit sales rose 12% to about 5 million.

Gateway has been under intense shareholder pressure to improve its performance and, last September, rejected a $450 million offer to buy its retail business.

The company's board is evaluating a request from a large shareholder that would place three of the investor's representatives on the board and eliminate a poison pill provision, making it easier for the company to be sold.

Gross profit margins dropped in the quarter to 5.2% from 6.2% a year earlier and 7.6% in the third quarter. The drop was due to margin declines in the professional and retail segments, which was somewhat offset by improvement in the direct segment, the company said.

The retail segment delivered fourth-quarter revenue of $755 million, down 5% over last year and up 21% over last quarter. The professional segment had $181 million in revenue, down 31% sequentially and 16% year-over-year. The direct segment delivered revenue of $85 million, up 14% from last quarter and down 26% from 2005.

Last October, Firebrand Partners LLC, which owns slightly more than 10% of Gateway's shares, requested three seats on the board and other changes, including electing the entire board each year rather than staggering terms.

Firebrand said if the board cannot fix the company's problems, it should consider putting Gateway up for sale.