The bell could be tolling for cheap computer maker eMachines Inc.
At least that’s how it seems after Stephen Dukker, Irvine-based eMachines chief executive, set a conference call for as early as this week to elaborate on the company’s dismal fourth-quarter results and its plans to make a profit selling cheap personal computers.
“While we were disappointed with the level of fourth-quarter revenues, we are pleased with the overall progress of our key business initiatives during 2000, particularly in light of the decline in consumer spending and the general economic climate,” Dukker said in a statement.
On Feb. 15, eMachines reported a 56% drop in fourth-quarter sales to $134.8 million vs. the year-ago period. The company’s loss from operations for the period came in at $31.2 million, vs. an operating profit of $2.2 million a year ago.
EMachines declined to comment for this story, referring reporters to the upcoming conference call.
The company is the No. 3 supplier of computers sold through U.S. retailers such as Circuit City Stores Inc., according to Reston, Va.-based market tracker PC Data Inc. Still, if eMachines continues losing money, the computer maker faces a harsh reality: it could run out of cash within a year.
With each quarterly loss, eMachines eats away at the money it generated through private placements in late 1999 and early 2000 and its initial public offering in March 2000. The fourth quarter’s loss took eMachines’ cash and short-term investments from $206 million as of Sept. 30 down to $112.9 million as of Dec. 30.
EMachines “continues to focus on cost-management, and expects to improve its cash position in the first quarter of 2001 through inventory sales and the collection of year-end receivables,” the company said in its fourth-quarter statement.
One analyst said he sees eMachines’ results as the beginning of the end for the company.
“When eMachines got into the market, I said that it would be a year before the company would be on the ropes and another year before they were out,” said Roger Kay, an analyst with Framingham, Mass.-based market researcher International Data Corp. “They’ve been on the ropes for a while. I’ll give them another year to wrap up their financials and their relationships.”
As with other computer makers, eMachines has had a tough time. A recent research report paints a dire picture for the computer market: after years of double-digit growth, computer shipments grew only 9.2% worldwide last year, according to IDC.
Even more troubling is the 24% decline reported by PC Data in computers sold through stores and catalogues,the only venues through which eMachines sells. On top of economic woes, the popularity of PCs has declined in favor of simpler devices that tap the Internet and do basic word processing.
“Obviously the consumer PC market has been down the past few months and eMachines has been caught in that downdraft,” said PC Data analyst Stephen Baker. “There’s certainly a market for the under-$600 (PC). In December, that market was flat.”
Analysts don’t expect conditions to improve any time soon. J.P. Morgan H & Q; analyst Walter Winnitzki offered a cautious note in a report following an eMachines advisory that its fourth-quarter results wouldn’t meet expectations.
“We have significantly reduced quarterly revenue estimates for the next four quarters with margins beginning to turn more positive in the second quarter and increasing further in the third quarter. While our estimates may be conservative, they are prudent given the current environment,” Winnitzki wrote.
Dukker isn’t throwing in the towel. In an earlier conference call, he said he expects that a new Microsoft Corp. operating system and technological advances “should return growth to historic levels.” Additionally, Dukker said eMachines still plans to build a North American production facility with TriGem Computer Inc., a South Korean company that makes some of eMachines’ computers and co-founded the company with Korea Data Systems.
While eMachines’ focus on cheap PCs could be its undoing, it brought the company notoriety in late 1998 and early 1999. Only a few months after opening its doors, eMachines shot past some of the largest computer makers to claim a spot among the top five retail computer sellers.
In the past year, eMachines has shipped nearly 3.5 million units through U.S. retail outlets. Comparatively, top computer maker Dell Computer Corp. shipped nearly 2.8 million units in the last quarter worldwide.
To offset declining computer sales, eMachines hoped to bring in a steady flow of money through its January 2000 acquisition of Internet marketing company FreePC Inc. With the deal, eMachines gained FreePC’s advertising system that enabled the company to stream ads to computer users. EMachines had hoped to market the system to advertisers looking to reach first-time Internet users.
Despite these efforts, sales generated via Internet ads accounted for only $2 million,or 1.6%,of eMachines fourth-quarter revenue. That figure dropped from the third quarter’s $2.8 million in Internet revenue.
Flagging computer sales and Internet revenue prompted J.P. Morgan Chase & Co.,an underwriter for eMachines’ public offering,to caution investors about the company.
“We continue to believe eMachines’ overall strategy of moving to become a hardware portal and driving an e-commerce strategy has merit, but in the near-term the shares are likely to be influenced by growth and profitability trends in the company’s hardware business,” the report said.
It’s unclear if eMachines has time to turn things around. In a bid to get profitable, the company has started selling computers to businesses. EMachines hoped the move would answer critics who said the company hasn’t sold to a wide enough variety of markets needed to survive in the cutthroat computer industry.
But sales to businesses may not be enough to cover the millions of dollars in write-downs generated by excess inventories of eMachines computers sitting on store shelves.
EMachines has options. It still has two deep-pocketed partners in Korea Data Systems and TriGem Computers. And while a stock offering to raise money is unlikely in a brutal stock market, eMachines still could find another partner to help it pursue its Internet strategy. But the clock is ticking.
“They came in as a bottom feeder. There are no profits on the low-end in the consumer computer market,” IDC’s Kay said. “They just don’t have the time.” n
