Gateway Posts Record Third Quarter Earnings - Company Financial Information

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

Fueled by continued momentum across all major segments of its core hardware business as well as non-system revenue that is now accelerating toward a pace of a billion dollars a year, Gateway (NYSE:GTW) Wednesday announced record third quarter earnings of $113.2 million, or $0.35 per split-adjusted diluted share, a 40 percent increase over year-ago levels.

Ted Waitt, Gateway's chairman and chief executive officer, said the third quarter demonstrates the strength of Gateway's innovative business model and its success in executing against that model in the marketplace.

"Our revenue stream is growing richer and more diverse quarter-by-quarter, giving us a very strong and unique position in the industry," Waitt said.

Jeff Weitzen, Gateway's president and chief operating officer, attributed Gateway's continued momentum to strong "back-to-school" sales for Gateway's consumer unit, record third-quarter performance in Asia-Pacific, strengthening performance in Europe and at Gateway Business.

"We're making steady progress on all fronts," Weitzen said. "For the first time in 10 quarters, each of our PC business segments saw unit growth of better than 30%, and our non-system revenue is now on pace to become a billion-dollar-a year business."

Of note was the continued rapid growth of Gateway.net, the Company's Internet service, which it launched in 1997. Gateway.net subscribers increased by 50% over the previous quarter to more than 600,000, making Gateway.net one of the fastest growing major ISPs in terms of organic growth.

Separately, Gateway and America Online Wednesday unveiled a strategic alliance to accelerate distribution of each company's products and services, create a host of new personalized Internet services and ramp up the "AOL Anywhere" vision of Internet access across multiple devices for consumers in the home and on the go.

Quarterly Sales In the third quarter of 1999, Gateway shipped 1,234,469 units, a 39% increase from the third quarter of 1998. Sales increased 20% to $2.18 billion from $1.81 billion a year ago. Net income increased 40% to $113.2 million or $0.35 per diluted share, compared to $80.6 million or $0.25 per split-adjusted diluted share in the second quarter of 1998. On Sept. 7, 1999, Gateway split its stock two-for-one.

Strong growth in the U.S. for the quarter was driven by continuing strength in Gateway's consumer segment, driven by a strong back-to-school season. Compared with last year, Gateway Consumer unit sales grew 44% and revenue grew 27%.

Gateway's U.S. business segment continued to show strong momentum in the third quarter, making this the fourth quarter of sequential growth. Gateway Business unit sales grew by 31% year-over-year, and revenue grew by 10%. Unit sales to small and medium businesses, Gateway's target business market, grew by 43% during the quarter, and revenues grew by 26%.

Internationally, Gateway accelerated last quarter with year-over-year unit growth of 55% and revenue growth of 34%. Gateway's Asia business continued its rapid growth, while Europe continued to show signs of improvement. In Asia, Gateway posted robust year-over-year unit volume growth of 72% and revenue growth of 57%. Asia's strong showing was driven by healthy growth across all markets and channels, with Japan, once again, posting significant revenue and unit growth exceeding the industry pace.

Europe had a strong showing in the third quarter, with unit growth up 38% and revenue up 11% over the same period last year.

Driven by a changing consumer mix and government seasonality, worldwide average unit prices (AUP's) declined 13.7% from a year ago to $1,765 and declined 7% from the second quarter of 1999. More importantly, gross margins for the quarter remained at a record 22.0%, up from 20.8% last year and equal to second quarter 1999 margins. This is the seventh consecutive quarter of year-over-year margin improvement.

Gateway Country stores expanded to 238 locations worldwide. In the United States, there are now 189 locations, an increase of 21 stores during the third quarter. In Europe, Gateway has 22 locations, an increase of ten during the quarter. In Asia-Pacific, there are 27 locations, an increase of five during the third quarter. By year's end, Gateway plans to have about 275 stores worldwide, including more than 200 in the United States. Further aggressive expansion of Gateway Country is planned into next year.

Selling, General & Administrative (SG&A) Expenses While Gateway continued to invest in long-term, strategic initiatives, the company remained ahead of plan in SG&A productivity for the quarter, and experienced a decrease in SG&A as a percentage of sales versus the second quarter. SG&A spending totaled $321.3 million, or 14.7% of sales, compared with $264.5 million or 14.6% of sales a year ago, and compared with $298.5 million or 15.6% of sales for the second quarter.

Operating Income Operating income for the third quarter rose to $158.8 million, a 40% increase over last year. Other income increased 42% to $18.0 million compared to $12.7 million in the third quarter of last year, primarily due to increased interest income.