Gateway Federal Plays a New Hand

By Richard McCaffery, Staff Writer Gateway Inc.'s federal division is storming back from a year of weak government sales with a strong push to regain federal market share and a new strategy to recruit resellers and integrators, a top company official said. The world's second largest direct-sales computer company is taking several big steps geared to spark government operations. Its federal unit has teamed with Unisys Corp. of Blue Bell, Pa., to bid contracts and offer government customers support services. Gateway is opening an office in Lanham, Md., the first time the company has had a dedicated federal office in the Washington area. Plans call for 60 employees to move into the facility in May. And the company is building a network of reseller partners to reach government customers while it aggressively bids bigger contracts, such as blanket purchase agreements."It's a benchmark year, absolutely," said Phil Kennett, who was named Gateway's vice president of federal government sales last November. "We'll just be a lot more active in the community and marketplace than we've been before."Indeed, Kennett said Gateway plans to bid every blanket purchase agreement that comes along in 1999. One it is now reviewing is a $100 million award from the Marine Corps for laptops, desktops and servers. A final request for proposals from the Marine Corps is planned for release this month.In January, Gateway expanded a commercial partnership with Unisys to include federal operations. It is the first time the computer maker has teamed with a worldwide systems integrator to support federal operations, Kennett said. The move is key to Gateway's plan to offer more than just desktops and notebooks to government customers. "Unisys gives us the capability to offer total solutions on a worldwide basis," Kennett said. "It's another step in Gateway's evolution to become a more complete supplier." Under the agreement, Unisys will provide Gateway customers with desktop support, repair services and installation, according to Terry Weipert, director of Unisys' network desktop practice. "It's a good strategic direction for us," Weipert said. "We want Gateway to be able to service Unisys customers, and this allows them to do it."Founded in 1985 by Ted Waitt and Mike Hammond, Gateway made a name for itself selling built-to-order computers directly to customers. The company, with its trademark black and white spots, grew quickly. It sold $100,000 worth of computer products in its first four months of operation. By 1998, Gateway reported $7.5 billion in sales, up 19 percent from 1997. Net income more than tripled, from $110 million in 1997 to $346 million in 1998 as Gateway trimmed costs and inventory, added new products and boosted gross margins.Gateway beat analysts' estimates the last two quarters of 1998, and most analysts still rate it a strong buy despite worries about soft PC markets and falling computer prices, according to Zacks Investment Research Inc. of Chicago. Since November, Gateway's stock price has nearly doubled, climbing from a little over $40 to $70 a share. In the federal market, Gateway has sold millions of dollars worth of computers and equipment to government customers from its General Services Administration schedule, which it received in 1994. Only rival Dell Computer Corp. of Round Rock, Texas, sells more products to the government via the GSA schedule.Gateway's business is split evenly between civilian and military agencies. Customers include the Air Force, Army, the Federal Aviation Administration and the departments of Agriculture and Energy. The company does not break out its federal revenue, but its GSA sales represent the bulk of its federal business, Kennett said.Despite good brand awareness, Gateway's GSA sales dropped to $214 million in 1998 from $230 million in 1997. This is not good news, considering Dell's GSA sales soared almost 60 percent to $427 million. Micron Electronics Inc., Nampa, Idaho, the third largest direct-sales computer company, also grew its GSA business in 1998.Kennett said sales slipped because Gateway relied heavily on its inside sales force, and because it did not focus enough on blanket purchase agreement opportunities. So the company is expanding partnerships with resellers and integrators like Government Acquisitions Inc. of Cincinnati, and Pulsar Data Systems of Lanham, and is in discussions with more than a half dozen resellers that it expects to sign as partners before year's end, Kennett said.It is the latest push in a companywide effort started last year. In April 1998, the computer maker formed Gateway Partners, the company's channel sales and marketing arm. The unit gives resellers expanded sales, marketing and management support. While a direct-sales vendor looking for reseller partners may sound strange, the company recognized that part of the marketplace likes doing business with value-added resellers, Kennett said. So Gateway is teaming with resellers that offer services such as systems integration and support, which will help the company win bigger contracts with enterprise customers. "We are expanding significantly beyond a direct relationship with the government," Kennett said. "You'll see an increase in partnering with resellers that add value." Integrator Government Acquisitions Inc. has worked with Gateway since 1994 and has been the exclusive holder of Gateway's GSA schedule since 1996. GAI offers services such as custom integration, special product add-ons, services and support, said Dennis Obial, GAI's president. Gateway recently stepped up its partnership with GAI through increased marketing efforts, joint sales calls and bid proposals, Obial said. And Gateway's strategy to place more emphasis on BPA contracts, which tend to be larger than purchases off of the GSA schedule, seems to be working. Since November, Gateway has won three BPAs, including a $400 million deal March 9 to provide the Air Force's Standard Systems Group with desktops, portable computers and servers. Other winning vendors were Dell and Micron Electronics.The award was Gateway's first BPA at the Standard Systems Group. "That's a terrific win and a excellent opportunity," Kennett said. "What it indicates to the Department of Defense is the Air Force has confidence partnering with Gateway. We believe it holds a lot of potential."Louis Mazzucchelli, vice president of research at Gerard Klauer Mattison & Co., New York, said Gateway has established credibility and brand awareness. "In terms of what the government does, Gateway knows how to meet those needs," Mazzucchelli said. "It comes back to branding for these guys, and the GSA schedule is a lovely lever. It magnifies marketing and advertising resources."Mazzucchelli expects Gateway to reap the benefits of improvements made to its federal andEuropean operations. "They know what to do," he said. "It's blocking and tackling. They just have to not drop the ball." Other wins include a $27 million deal in November with the Naval Warfare Systems Command, and a $10 million award in February with the Energy Department.