Gateway Reports Record Shipments for the Third Quarter - Three Times Worldwide Market Growth - Company Financial Information

Edge: Work-Group Computing Report, Oct 26, 1998

Gateway Thursday reported results for the third quarter ended September 30, 1998. Gateway shipped a record 887,000 PCs in the third quarter, a 43% increase over third quarter 1997 shipments of 622,000. Sales increased 21% to $1.82 billion from $1.50 billion a year ago. Net income in the current quarter was $80.6 million or $.51 per share compared to a net loss of $107.1 million or a net loss per share of $.68 in the third quarter of 1997.

"Our strong third quarter unit growth was driven by demand for our Your:)Ware program coupled with back-to-school purchases and our Gateway Country stores," said Gateway Chairman and CEO, Ted Waitt. "We also accomplished our goal of building a world-class team with the addition of several new senior level positions. In July, we added Maynard Webb as Senior Vice President and Chief Information Officer; in September, Todd Bradley came on board as Senior Vice President and Regional Managing Director of our Europe, Middle East and African operations plus Van Andrews as Senior Vice President of Gateway Business. With the impending retirement of Dave McKittrick, we announced this month the addition of John Todd as Senior Vice President and Chief Financial Officer and a new Senior Vice President and Regional Managing Director of our Asia Pacific operations, Frank Smilovic. In under ten months, we assembled a top management team that will fuel Gateway's growth as we continue to gain market share in both the consumer and institutional markets."

"In the third quarter, we achieved a record 8.5% of the total U.S. market share, up 1.8 share points from a year ago," said President and COO of Gateway, Jeff Weitzen. "U.S. Home market share grew 2.3 share points to a 14.1% share of the market, based on DataQuest's market estimates for the third quarter. Clearly, the quality of our products and services is driving our approval ratings to record levels. Gateway shipments grew at three times the market and we achieved a 94% level of brand awareness during the third quarter. Approximately 75% of Gateway clients who bought a new computer in 1997 repurchased a Gateway system, the highest brand loyalty rating in the industry, based on the 1997 Technology User Profile from ZD Marketing Intelligence."

"Additionally, to better serve small and medium-sized businesses, we have added dedicated sales representatives in our call centers and have created business solution centers in our Gateway Country stores. We have also launched a simple, straightforward program including Gateway desktops, portables and servers, targeted for these business clients. We will continue to focus on these business initiatives, driving up our share in this valuable market segment. Demand for the Company's products was consistently good throughout the quarter; however, we experienced a number of component quality and shortage problems, which resulted in an increase of over 40% in our backlog compared to the end of the second quarter," added Weitzen.

Third Quarter 1998 Business Review The record unit growth of the Company was primarily the result of the strong performance in the Americas region, accounting for 89% of total unit sales. Unit sales were also very strong in the Asia Pacific region despite the economic situation there; unit shipments were up 74% compared to the prior year third quarter. European unit sales were flat year over year for the same period.

Gateway continued to expand the retail Gateway Country stores with 27 new stores this quarter, bringing the total number of stores to 85.

In addition to robust desktop unit sales, the sales of other products were particularly strong. Sales of Gateway portable products hit record high levels in the quarter, up 96% over the prior year and up 38% over the second quarter of 1998, accounting for 11% of total unit sales. Server unit sales were up 297% over the third quarter of last year when the Company entered the business with the acquisition of ALR. On a sequential basis, server units increased 27%. Shipments of the Company's convergence products increased 80% over the prior year third quarter and increased 48% sequentially.

Average unit prices (AUPs) declined 15% to $2,046 in the quarter compared to last year's third quarter and were down 7% sequentially. These declines were caused by industry-wide trends to lower priced PCs and continued reductions in component costs that have not been offset by the introduction of newer technologies.

Because the strong unit sales were offset by the impact of declining AUPs, revenues increased 21% compared to the unit increase of 43% over the third quarter of last year. Revenues in the Americas region were up 27% and revenues in the Asia Pacific region were up 35% to $101.8 million over the third quarter of 1997. Revenues from the European region declined 14% from the third quarter of last year to $106.8 million.

Gross margins in the quarter were at a record high level of 20.8%, up from 20.6% in the second quarter as the Company realized benefits from higher margin products encompassed under the Your:)Ware marketing program, as well as the benefits of the direct model and decreasing component costs.