Financial: Gateway Reports Record Q4 - Company Financial Information

Edge: Work-Group Computing Report, Jan 25, 1999

Gateway Thursday reported record sales of 1,151,000 PCs, a 35% increase from fourth quarter 1997; record sales of $2.31 billion and record earnings per diluted share of $0.81 for the fourth quarter ending December 31, 1998. "We delivered record results across all major aspects of our business in the fourth quarter," said Ted Waitt, Chairman and Chief Executive Officer of Gateway.

"Improved execution and solid fundamentals allowed us to exit the year with excellent momentum. We grew twice as fast as the market overall, and even faster in the consumer segment, allowing us to achieve record market share for the 32nd consecutive quarter." Quarterly Sales Cross $2 Billion Mark For the First Time In Gateway History Fourth quarter revenue was $2.31 billion, up 17% from the $1.98 billion recorded a year ago. Gateway's record unit growth was due to strong sales across all geographic areas. The Americas region grew 34.5% in units and 15.9% in revenue over 1997's fourth quarter. Europe turned the corner this quarter with a 20.9% increase in units and a 1.6% increase in revenue compared to fourth quarter last year due to successful launches of Your:)Ware and Gateway Country stores. Growth in Asia Pacific continued its momentum with an increase of 73.9% in units and an increase of 50.6% in revenues compared to the fourth quarter of 1997. Average unit prices (AUPs) decreased 14% to $2003 in the fourth quarter compared to $2326 last year and decreased 2% compared to the third quarter of 1998. With the addition of 59 stores in the fourth quarter, Gateway Country expanded to 144 stores in the U.S. at year end 1998. Gross Margins Increase For the Fifth Consecutive Quarter Due to aggressive supplier management, effective pricing management, a richer product mix and continued declining component costs, gross margins increased for the fifth consecutive quarter, hitting another record high this quarter of 21.6% compared with 18% last year and up from 20.8% in the third quarter of this year. Selling, General & Administrative (SG&A) Improves 1.1 Points on a Sequential Basis SG&A spending totaled $310.6 million or 13.5% of sales up from last year's level of $215.5 million or 10.9% of sales and up from third quarter's level of $264.5 million or 14.6% of sales. The increase is attributable to supporting the strong unit growth this quarter plus the long-term investments in the infrastructure to improve scalability. Operating Income Grows at 34% Operating Income for the fourth quarter of 1998 was $188 million compared to $140 million a year ago. Other income increased to $14 million, more than doubling from fourth quarter 1997. Net Income Grew 39% on 17% Sales Growth In the fourth quarter, net income rose to $129 million or $0.81 per diluted share compared to $93 million or $0.59 per diluted share in the fourth quarter last year. Earnings per diluted share of $0.81 is a 37% improvement from one year ago. Cash Flow Reaches $1.3 Billion Level Cash and marketable securities' increases were driven by strong working capital performance. Strong inventory management programs once again resulted in record highs for the company. Inventory turns were 40 compared to 21 a year ago and 33 last quarter. The cash conversion cycle continues to improve to a negative 5 days. The effective tax rate for the quarter was 36% which was consistent throughout the year. Jeff Weitzen, President and Chief Operating Officer, commented, "We were able to deliver these results because our execution continuously improved over the year with fourth quarter being our best. Our phone, retail and web channels all performed well and even more importantly, in harmony, giving customers a superior buying experience. Gateway's brand awareness continues to grow as does our market share. We are effectively managing all of our costs, expenses and inventory levels which led to our record margins, inventory turns and cash." 1998 Highlights "1998 was a very successful year for Gateway," said Waitt. "We built a great foundation for future growth by dramatically enhancing our management team, adding over 100 new Country locations, and adding new administrative, manufacturing, IT and support facilities. We also launched Your:)Ware diversifying our business into financing and the Internet. We accomplished all this while simultaneously increasing our revenue, market share and earnings to record levels." Unit shipments for the year ended December 31, 1998, increased 37% to 3,541,000 units compared to 2,580,000 units shipped in 1997. Sales in 1998 increased 19% to $7.47 billion compared to $6.29 billion in 1997. Net income for the year was $346.4 million or $2.18 earnings per diluted share compared to $109.8 million in 1997 or $.70 earnings per diluted share. A revolutionary way to buy a PC, "Your:)Ware," was launched in 1998. Gateway Country added 107 stores during the year. Gateway experienced strong growth in its Internet service business with the gateway.net subscriber base exceeding 200,000 by year end. Gateway aggressively strengthened its senior management team throughout the year, adding nine key senior officers to the management ranks. Inventory turns grew from 21 to 40 over the course of the year. The Company announced further expansion to several new business locations in 1998: San Diego, Irvine, and Lakewood, Colorado. Gateway's brand building efforts gained significant momentum in 1998. Total brand awareness increased from 87% at the end of 1997 to 95% at the end of 1998, while unaided awareness grew 10 points during the same period. We exited the year with a 9.6% share of the total U.S. market. Business Outlook "We are exiting the year with good momentum, solid fundamentals and a strong foundation for growth. In 1999, we will capitalize on this foundation, continue to grow consumer market share, improve our position in the business market, continue to expand internationally and rapidly expand our Internet business," said Waitt. Annual Meeting The 1999 Annual Meeting of shareholders of Gateway will be held on May 20, 1999, at the Sioux City Convention Center, 801 Fourth Street, Sioux City, Iowa, at 9:00 a.m. local time. Gateway (NYSE: GTW), a Fortune 500 company founded in 1985, provides complete computing solutions for clients worldwide. The Company has manufacturing facilities in the United States, Ireland and Malaysia and employs over 19,000 people worldwide. Gateway products and services consistently win top awards from leading industry publications. Revenue for the year 1998 was $ 7.5 billion. For further information, visit Gateway at www.gateway.com.