Gateway shipped 767,000 PCs during the quarter, a 38% increase over first quarter 1997 shipments of 555,000. Sales increased 22% to $1.7 billion from $1.4 billion a year ago.

Net income and diluted earnings per share both increased approximately 12%. Net income was $75.9 million or $.48 per share compared to $67.5 million or $.43 per share in the first quarter of 1997.

"Our strong first quarter unit growth was driven by continued healthy demand in consumer markets and expansion of Gateway Country stores," said Ted Waitt, Chairman and CEO of Gateway 2000. "We were also pleased to effectively execute on a number of important fronts. Our inventory turns increased to 26 this quarter, setting a new company record. This reduction in inventory, combined with operating results and declines in other elements of non-cash working capital, contributed to an increase in cash and marketable securities of approximately $177 million, resulting in cash and securities’ balances at the end of the quarter of over $800 million. Our gross margins were up to a record level of 19.5% from 18.7% in the first quarter of 1997, as we were able to take advantage of continuing component cost declines by virtue of our direct business model."

"This quarter, we also appointed Jeff Weitzen as President and Chief Operating Officer. Jeff’s talents and expertise in management and business development will be instrumental in the introduction of new and exciting initiatives, aimed at serving both the home and business client, that enhance our long-term earnings outlook," continued Waitt.

"As we continue to grow the business and help Gateway define its Next Level, our commitment to our clients remains a priority," said Jeff Weitzen, President and COO of Gateway 2000. "As we work to humanize the digital revolution, we will focus on cost and service strategies to adapt the latest technology to our clients’ needs."

FIRST QUARTER - 1998 BUSINESS REVIEW

Sales from international operations represented 15.4% of total company sales. Unit shipments from the EMEA region were up 4.2% from last year, but revenues declined 8.2% and represented 9.4% of total sales in the quarter. Revenues in the Asia/Pacific region continued to grow nicely and were up 31.5% from last year, contributing 6.0% to total sales. Shipments of portable products increased 51% over the first quarter of 1997, and represented 11.6% of total sales.

Margins were 19.5% compared to 18.7% in the first quarter of 1997. Margins expanded from the 18.0% realized in the fourth quarter of 1997, as the direct model benefited from continued component cost declines and improved inventory turns. During the first quarter, the company particularly benefited from its suppliers’ lower cost of manufacturing in the troubled Asia/Pacific region and by over-capacity in some segments of the component industry.

Average unit prices (AUPs) decreased 3.1% during the quarter to $2,253 compared to $2,326 in the fourth quarter of 1997. AUPs for the quarter were down 12.0% compared to first quarter 1997 AUPs of $2,558.

Selling, General and Administrative (SG&A) expenses increased approximately $12 million or 5.5% over the fourth quarter 1997 primarily due to increased customer support costs, increased payroll taxes caused by stock option exercises, and higher than normal recruiting expenses. SG&A increased 33% over the first quarter of 1997 due to the general growth of the business. As a percent of sales, SG&A was 13.2% compared to 12% in the first quarter and 10.9% in the fourth quarter of 1997.

Other Income increased 14% over the first quarter of 1997, reflecting additional interest income from higher levels of cash and marketable securities. The effective income tax rate for the quarter was 36.0% compared to 34.5% in the first quarter of 1997. The effective tax rate for 1997 was 35.5% after eliminating the impact of certain non-recurring charges. The increase in the effective tax rate reflects shifts in the geographic distribution of earnings. Two new call centers were opened in the first quarter, one in Rio Rancho, New Mexico and another in Colorado Springs, Colorado.

Gateway Country stores opened in the first quarter in Clearwater, Florida; Cranston, Rhode Island; Portage, Michigan; Morrow, Georgia; Mission Viejo, California; and Monrovia, California. These six new stores bring the total domestic Country stores at the end of the quarter to 43.

Awards

• General awards
  • PC World named Gateway as the best company to buy a PC either direct or via the Web in its cover story "Store Wars, The Best and Worst Places to Buy a PC."
  • PC Computing named Gateway as number one provider of technical support in the direct PC market.
• Portables
  • Editor’s Choice award from PC Magazine for the Solo 2300 #1 Top 10 Power notebook from PC World for the Solo 2300XL First-Class Award from Windows Sources for the Solo 9100LS
• Desktops
  • Gateway desktop PCs received 10 PC World Best Buy awards
  • Best Value Desktop from Computer Shopper for the GP5-166
  • Editor’s Choice from c/net computers.com for the G6-300
• Gateway’s Web site, www.gateway.com
  • Gateway’s Web site, www.gateway.com, received top score in a USA Today/Intelliquest survey of PC vendors that sell PCs over the Internet.
• gateway.net Internet Service Provider
  • 5 out of 5 stars from PC Computing for gateway.net on a G6-300
• Servers
  • Stellar award from Windows Sources for the NS-8000 server

UK

• PC Home, March 1998, Gold Award, G5-166M
• PC Advisor, May 1998, Best Buy, G6-333XL
• PC Magazine, May 1998, Editors Choice
• PC Advisor, May 1998, Best Buy, Solo 9100 S5-266XL

France

• Info PC, January 1998, Magazine's Choice, G6-300XL
• Info PC, March 1998, Editors' choice, 9100 -S5-266XL

Germany

• PC Magazine, April 1998, System of the Year, G6-300XL
• PC Magazine, April 1998, Portable of the Year, Solo S5-233XL

Sweden

• PC Extra, February 1998, Best Value, Solo 2300

Benelux

• Computer!Totaal March 1998, Best Buy, G6-333XL

Australia/New Zealand Publications

• Sydney Morning Herald, January 98, Best product of 1997, G6-266
• Internet.Au, January 98, Readers Awards – Most Popular Computer, G6-300
• PC World, February 98, #1, #6 Corporate Top Ten, GP5-200, G6-233
• PC User, February 98, PCs for first-time buyers – Best Buy, GP6-233 PC World, March 98, #1, #2 Top Ten Blue Chip PCs, GP5-200, G6-233

Japan

• Nikkei Personal Computing, Ranked No 1 in Portables Performance Ranking, Gateway Solo 9100 233XL

"Gateway’s performance in the first quarter, despite difficulties in the industry, reflects effective execution of our build-to-order model," said Waitt. "Our ability to leverage brand strength, incorporate rapid technology changes and falling component costs allows us to continually deliver great value to our clients. We are cautiously optimistic in the short term but believe Gateway’s momentum will accelerate in the second half of the year as a result of marketing investments we are now making. Through exciting new initiatives, a new brand strategy and a strengthened management team, Gateway will help define the next level of performance for the PC industry."

Annual Meeting

The 1998 Annual Meeting of shareholders of Gateway 2000, Inc. will be held on May 21, 1998, at the Sioux City Convention Center, 801 Fourth Street, Sioux City, Iowa, at 9:00 AM CDT. Additionally, we will offer an audio broadcast of our Annual Meeting through our Web site, www.gateway.com.

Special Note

The above statements include forward-looking statements based on current management expectations. Factors that could cause future results to differ from these expectations include the following: general economic conditions; growth in the personal computer industry; competitive factors and pricing pressures; risks relating to acquired businesses; component supply shortages; and inventory risks due to shifts in market demand. Additional factors are described in the company’s reports filed with the Securities and Exchange Commission.

About Gateway

Gateway 2000 (NYSE: GTW), a Fortune 500 company founded in 1985, is a leading global direct marketer of PC products. The company has manufacturing facilities in the United States, Ireland and Malaysia and employs over 13,000 people worldwide. Gateway products and services consistently win top awards from leading industry publications. Revenue for the year 1997 was $6.3 billion. For more information, visit Gateway at www.gateway.com.

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