Gateway Reports First Quarter 2006 Results

IRVINE, Calif., April 27 /PRNewswire-FirstCall/ -- Gateway, Inc. today reported results for its first quarter ended Mar. 31, 2006.

The company recorded a first quarter net loss of $12.3 million, or 3 cents per diluted share, compared with a net loss of $20.9 million, or a loss of 5 cents per diluted share in the prior quarter, and a net loss of $5.2 million, or a loss of 1 cent per share a year earlier. Gateway's first quarter results include a total of $14 million in litigation expenses.

Revenue amounted to $1.078 billion, compared with $1.124 billion in the fourth quarter of 2005 and $838 million a year earlier.

"In the first quarter, our Retail business unit, which also includes our international sales, continued to perform very well in terms of both sales and margin," said Rick Snyder, Gateway chairman and interim chief executive officer. "Unfortunately, our positive Retail results were partially offset by losses in our Professional sales unit. As a result, we essentially broke even in the quarter, prior to litigation expenses of $14 million."

"Recently, we installed new leadership at the top of our Professional and Direct business units and our plan is to continue to aggressively address issues in those areas so that we can return Pro and Direct to profitability over the next three to four quarters. We continue to view Professional and Direct as strategic components to our long-term success."

Gateway's prior quarter operating results included a one-time $16.7 million charge associated with the cross-license and settlement agreement with HP and a $26.6 million charge related to a prior years' tax liability dispute, of which $24.8 million was recorded as a selling, general and administrative (SG&A) expense.

Overall Performance

The company sold 1,379,000 PC units in the first quarter, up 1.5 percent sequentially, and up 47 percent year-over-year. The increase in unit sales on a sequential and year-over-year basis is primarily due to market share gains in Retail. Based on recent IDC data, Gateway was the fastest growing PC company in the U.S. among the top six vendors on both a sequential and year-over-year basis. Among the top six vendors, Gateway was the only company to experience sequential unit growth in the U.S. in the first quarter.

Gross margin percentage for the first quarter was 7.3 percent, compared with 6.2 percent in the prior quarter and 9.6 percent in the first quarter of 2005. The sequential increase in gross margin is due primarily to a $16.7 million charge in the fourth quarter associated with the HP agreement. The year-over-year declines in gross margin percentage are due to lower margins in Professional and strong growth in the Retail business, which typically has lower margins.

SG&A expense in the first quarter was $103 million, or 9.6 percent of revenue, down from $113 million (including $2.8 million in restructuring costs) in the prior quarter, and up from $88.1 million (including $8 million in restructuring costs) in the first quarter of 2005. The first quarter sequential decrease in SG&A was due to a one-time $24.8 million increase in accrual for sales/use taxes in the fourth quarter that was partially offset by $14 million in litigation expenses in the first quarter.

Segment Results

The Retail segment, which includes the company's international sales, delivered revenue of $767 million, with PC units of 1,163,000. Retail revenue was down 3 percent sequentially and up 61 percent year-over-year. Retail PC units increased 3 percent sequentially and 62 percent year-over-year. The sequential decrease in revenue reflects lower average unit prices that were mitigated by strong market share gains. The year-over-year revenue increases reflect strong market share gains in U.S. Retail, including growth in the company's international business. Gateway and eMachines products are now sold in more than 7,000 retail locations in the U.S. and Canada and in more than 2,500 retail locations internationally, including France, Japan, Mexico and the UK.

The Professional segment delivered revenue of $202 million, with PC units of 158,000. Professional revenue decreased 7 percent sequentially and 4 percent year-over-year. Professional PC units were down 5 percent sequentially and increased 7 percent year-over-year. The sequential and year-over-year decreases in revenue were predominantly due to competitive pressures.

The Direct sales segment delivered revenue of $109 million, with PC units of 58,000. Direct revenue decreased 6 percent sequentially and 27 percent year-over-year. PC units were flat sequentially and decreased 23 percent year-over-year. The year-over-year decline in revenue was due to changes in product and marketing strategies.

Total non-PC revenue, which includes sales of stand-alone monitors, software, peripherals, services and accessories, was down 15 percent sequentially and up 21 percent year-over-year, excluding consumer electronics (CE). The year-over-year increase reflects strong sales of stand-alone monitors, particularly those sold through Retail. Non-PC sales, excluding CE, represented 17 percent of total revenue in the first quarter, which compares with 19 percent in the fourth quarter and 18 percent a year earlier. Gross margin contribution from non-PC products and services, excluding CE, was down 12 percent sequentially and down 8 percent from a year earlier.

Cash and marketable securities

Gateway ended the quarter with $590 million in cash and marketable securities, an increase of $4.5 million from the fourth quarter of 2005. This increase was driven by a $37.3 million decrease in inventory and a $17.5 million decrease in other current assets which were offset by a $45.8 million decrease in accounts payable and a $7.3 million increase in accounts receivable.

Revised reporting schedule

Gateway will report earnings for the second quarter on Thursday, Aug. 3, 2006.

Conference call information

Gateway will host a conference call for analysts on Thursday, Apr. 27 at 5:30 pm EST/2:30 pm PDT, which will be accessible via live audio webcast at http://www.gateway.com/.

About Gateway

Since its founding in 1985, Irvine, Calif.-based Gateway has been a technology pioneer, offering award-winning PCs and related products to consumers, businesses, government agencies and schools. Gateway is the third largest PC company in the U.S. and among the top ten worldwide. The company's value-based eMachines brand is sold exclusively by leading retailers worldwide, while the premium Gateway line is available at major retailers, over the web and phone, and through its direct and indirect sales force. See http://www.gateway.com/ for more information.

Special note

This press release contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not materialize or prove incorrect, could cause Gateway's results to differ materially from those expressed or implied by such forward-looking statements. All statements, other than statements of historical fact, are statements that could be forward-looking statements, including any projections or preliminary estimates of earnings, revenues, or other financial items; any statements of plans, strategies and objectives of management for future operations; the extent of seasonal changes in demand; any statements regarding proposed new products, services or developments; any statements regarding future economic conditions or performance; statements of belief and any statement of assumptions underlying any of the foregoing. The risks that contribute to the uncertain nature of these statements include, among others, risks related to shifting our distribution model to third-party retail; competitive factors and pricing pressures, including the impact of aggressive pricing cuts by larger competitors; general conditions in the personal computing industry, including changes in overall demand and average selling prices, shifts from desktops to mobile computing products and information appliances and the impact of new microprocessors and operating software; the ability to simplify the company's business, change its distribution model and restructure its operations and cost structure; component supply shortages; short product cycles; the ability to access new technology; infrastructure requirements; risks of international business; foreign currency fluctuations; risks relating to new or acquired businesses, joint ventures and strategic alliances; risks related to financing customer orders; changes in accounting rules; the impact of litigation and government regulation generally; inventory risks due to shifts in market demand; the impact of employee reductions and management changes and additions; and general economic conditions, and other risks described from time to time in Gateway's Securities and Exchange Commission periodic reports and filings. Gateway assumes no obligation to update any forward-looking statements to reflect events that occur or circumstances that exist after the date on which they were made.

Gateway, Inc. Consolidated Condensed Statements of Operations (in thousands, except per share amounts) (unaudited) Three months ended March 31, 2006 2005 Net sales $1,077,822 $837,781 Cost of goods sold 999,094 757,416 Gross profit 78,728 80,365 Selling, general, and administrative expenses 103,096 88,126 Microsoft benefit 8,625 0 Operating income (loss) (15,743) (7,761) Other income, net 2,237 1,814 Income (loss) before income taxes (13,506) (5,947) Benefit (Provision) for income taxes (1,171) (761) Net income (loss) (12,335) (5,186) Gain on redemption of preferred stock, net of dividends -- -- Net income (loss) attributable to common stockholders $(12,335) $(5,186) Net income (loss) per share: Basic $(0.03) $(0.01) Diluted $(0.03) $(0.01) Weighted average shares outstanding: Basic 372,982 371,152 Diluted 372,982 371,152 Gateway, Inc. Consolidated Condensed Balance Sheets (in thousands) (unaudited) March 31, 2006 December 31, 2005 ASSETS: Current assets: Cash and cash equivalents $458,012 $422,488 Marketable securities 132,194 163,200 Accounts receivable, net 352,548 345,288 Inventory 182,015 219,344 Other 392,929 423,752 Total current assets 1,517,698 1,574,072 Property, plant, and equipment, net 86,860 83,156 Intangibles, net 38,223 39,462 Goodwill and non-amortizable intangible assets 205,219 205,219 Other assets 19,685 19,156 $1,867,685 $1,921,065 LIABILITIES AND EQUITY: Current liabilities: Notes payable $50,000 $50,000 Accounts payable 716,118 761,895 Accrued liabilities 286,479 249,111 Accrued royalties 57,520 68,216 Other current liabilities 161,543 175,745 Total current liabilities 1,271,660 1,304,967 Long-term debt 300,000 300,000 Other long-term liabilities 54,007 60,825 Total liabilities 1,625,667 1,665,792 Stockholders' equity 242,018 255,273 $1,867,685 $1,921,065