April 26, 2001, 12:00 AM

Egghead reports lower quarterly sales, reduced losses

First quarter revenue at Egghead.com Inc fell to $85.3 million from $152.1 million in Q1 2000 due to the elimination of low-margin items.

First quarter revenue at Egghead.com Inc., an Internet direct marketer of technology and related products, fell to $85.3 million from $152.1 million in the first quarter of last year, Egghead reported today. The company says the decline was due to the elimination of low-margin products and reduced consumer demand for technology products. Gross profit increased to $9.4 million for the quarter from $8.8 million for the comparable quarter a year earlier. Operating expenses for the quarter were $18 million, compared to $32.5 million, excluding merger-related costs, for the same quarter a year ago. Net loss for the quarter was $8.1 million, compared to a net loss of $25.1 million a year ago.

"Our new business model is already proving itself, as evidenced by our gross profit improvement on a reduced sales base," said Mark Shepherd, senior vice president and CFO of Egghead.com.

The company says it is on track to reach profitability in the fourth quarter of this year. "We continue to make steady progress in executing our plan to build a business based upon profitable sales, stable margins, and ongoing growth in the sale of technology products to business customers," said Jeff Sheahan, president and CEO of Egghead.com. "It is clear, however, that 2001 will be a challenging year for the technology products industry. Recognizing this, we have taken steps to get out in front of current business conditions with our recent right-sizing of the business. By streamlining and refining our business sales model, we now have a more efficient and productive operation from which to take the business forward."

After a detailed analysis of business sales, Egghead determined it could scale back the number of sales representatives, and more effectively focus representatives on the highest potential small- to medium-sized business customers. As of March 31, 2001, Egghead.com had approximately 52,000 business accounts assigned to sales representatives. Sales to the assigned accounts rose 30% over the previous quarter as sales representatives began to develop their high value customers and garner incremental revenue from this segment of the assigned base, the company said. Accounts assigned to business sales representatives made up 35% of the company`s overall sales in the quarter, up from 25% in the previous quarter.

"Beginning in the second quarter, we will see a significant reduction in our operating expenses as a result of our recent right-sizing actions,” Sheehan said. “The reduction in our Accounts Payable reflects the consolidation of our vendor base to those vendors who help contribute the most to our bottom-line. In addition to the $15.6 million of cash we had at the end of the quarter, we are pleased to have borrowing capacity of up to $20 million under our IBM Global Financing agreement. The IBM facility provides us with increased vendor financing opportunities as we begin to utilize its potential."

Egghead anticipates that for the full year 2001 sales will be between $320 million and $350 million, margin rates will rise as the year progresses and average between 11% and 12%, operating expenses will be between $45 million and $55 million and the company will reach profitability by the fourth quarter.

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