An Irvine company that came out of nowhere to become one of the nation's largest personal computer makers by selling machines for less than $600 said Tuesday it planned to raise $200 million in an initial public stock offering.
eMachines Inc. has sold more than 1 million PCs since it first began shipments last November, and the company now accounts for one out of every nine PCs sold in retail stores in the U.S. However, it has yet to turn a profit. eMachines lost $3.9 million on revenue of $351 million through the first half of this year, according to a Securities and Exchange Commission filing made Tuesday.
The company was formed last September and is primarily owned by two Korean companies, TriGem Computer and Korea Data Systems Co., which own 28.5% and 28.2%, respectively. The company got a huge boost in June from America Online Inc., the country's largest Internet service provider, when it signed a marketing agreement in which AOL will provide rebates of up to $400 to eMachines buyers. As part of the deal, AOL took an 8.7% stake in the company.
eMachines' filing with the SEC did not say how many shares the company planned to sell or at what price. Company officials declined to comment.
Industry experts credit eMachines' strong start to effective planning and execution.
"eMachines is really focused on production efficiency and they lined up their production, distribution and outsourcing relationships before anything else, making sure they were concrete before going forward," said Matt Sargent, an analyst with InfoBeads, a San Diego computer industry research firm.
eMachines farms out virtually all of its operations--manufacturing, warehousing, distribution, research, product design, warranty services and customer support--leaving sales, marketing and administrative functions to eMachines employees. At the end of June, the company had only 49 employees.
eMachines is led by Stephen A. Dukker, 46, who had previously been senior vice president of merchandising and operations of Computer City, a subsidiary of Tandy Corp. that has since been acquired by Dallas-based CompUSA Inc. Dukker owns 8% of the company.
Dukker, who co-founded the company with the Korean companies, attended the University of Chicago.
eMachines said it would use the proceeds of the stock sale to, among other things, finance a new low-cost Internet access service called e-machines.net. Like its computers, the service, which is slated to begin by the end of the year, would be outsourced.
Because eMachines focuses on the low end of the retail market--nearly all of its computers sell for less than $600 but do not include a monitor--its profit margin tends to be razor thin.
In the first six months of this year, the company sold $351 million worth of computers and had a gross profit margin of only 3.6%. Market leader Compaq Computer Corp., by comparison, had gross margins of 20.9% during the same period. That figure is from all of Compaq's computer products, which range from the low-end desktop for consumers to high-end servers for businesses.
While the margins in low-end PCs are small, it's a growing market. In September 1998, sub-$600 personal computers accounted for less than 1% of the number of units sold, according to InfoBeads. Last June, they accounted for 28%.
"They are focused on a very good niche right now," said Stephen Baker, an analyst with PC Data Inc., which tracks computer sales. "If they can manufacture the computers efficiently and get the right pricing, there's no reason that they can't make up the low margins with high volume."
eMachines has been particularly successful in turning out new product lines every few months, reducing or eliminating the chance that retailers will be stuck with outdated computers on their shelves, Baker said.
By pushing computer prices so low, the PC world has successfully fought off what had been a possible future of information appliances that performed specific tasks, such as WebTV for accessing the Internet or devices for e-mail, Baker said.
"If you can get a computer for $400, it's hard to argue to buy a $200 device that just accesses the Internet," Baker said.
eMachines faces litigation from two larger competitors.
Compaq in July accused the company of infringing on 13 patents that the Houston computer manufacturer held related to how the computers functioned. And earlier this month, Cupertino-based Apple Computer Corp. filed a lawsuit saying that in producing its eOne computers eMachines had stolen the exterior design of Apple's popular iMac line, although the inner workings are completely different.
eMachines has not yet responded to either lawsuit.
Computer hardware stocks have done well this year, with the Goldman Sachs Computer Hardware Index having gained 28.6% since Jan. 1, outperforming both the Nasdaq Composite and the Dow Jones Industrial Average.