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Press Release
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Gateway Reports Second Quarter Results Shipments up 33% over 1997 North Sioux City, S.D., July 23, 1998 - Gateway (NYSE: GTW), a global leader in the direct marketing of personal computers, today reported increased shipments, sales, net income and earnings per share for the second quarter ended June 30, 1998, compared to the second quarter of 1997. Gateway shipped 736,000 PCs in the second quarter, a 33% increase over second quarter 1997 shipments of 554,000 units. Sales were $1.62 billion, a 16% increase from the $1.39 billion of a year ago. Net income rose 8% to $60.7 million and diluted earnings per share increased 6% to $.38 from the $.36 recorded in the second quarter of 1997. Commenting on activities during the quarter, Gateway Chairman and CEO Ted Waitt said, "We set out to strengthen our management team, enhance our brand position and introduce new innovative offerings to the market. In June, we added Anil Arora as Senior Vice President and Chief Marketing Officer. Today, we announced Maynard Webb as Senior Vice President and Chief Information Officer, and shortly we expect to announce a new leader of our European operations. We invested significantly in our new branding campaign and launched our Your:)WareSM program at the end of May. This program is knocking down the barriers to entry for people who want to participate in the digital revolution. After a seasonally slow April and May, our marketing programs kicked in, driving a dramatic increase in volume in June and creating good momentum for the second half of the year." "Our brand objectives are clearly working," said Jeff Weitzen, President and COO of Gateway. "The quality of our products and services is driving demand, as seen by the successful introduction of our Your:)WareSM program. We have also raised the level of awareness among consumers through our new branding program and marketing Gateway as the best choice for delivering the benefits of computing to all PC customers. In fact, Gateway leads all other brands in customer loyalty according to the Ziff-Davis 1998 Technology User Profile." Second Quarter, 1998 Business Review Sales increased 16% over the second quarter of 1997. Sales of Gateway" portable products in the quarter were 14% of total sales, a new record for the company, up 32% over the prior year. Gateway made its largest portable sale in Company history when it sold more than 1,400 Solo® 9100 multimedia computers to Galaxy Scientific Corporation, a federal government contractor. Due to the burst of demand in June, order backlogs were 18% higher at the end of June compared to the end of the first quarter. Following soft April sales, demand returned to more normal seasonal levels in May and began to strongly accelerate in June as Your:)Ware and other marketing initiatives were launched. The Your:)Ware consumer program drove up new sales calls by 80% and increased units shipped by 48% during the month of June over the prior year. Over 60% of the consumer units sold from the program's initiation in late May through the end of the quarter were under the Your:)Ware program. Software attach rates in the quarter increased four times over last year and our gateway.netSM Internet service active user base continued to rapidly expand. Gateway's investment in brand building increased awareness for the seventh consecutive quarter to a record level of 92%. Additionally, future purchase consideration rose to its highest level ever of 40%. The Company also achieved the highest level of brand loyalty in the personal computer industry with a 75% rating, driven by the quality of our products and services. Gateway's products were broadly recognized by industry analysts and publications, winning 71 awards during the quarter. AUP's declined 12.5% to $2200 in the quarter compared to the prior year's quarter. On a sequential basis, AUP's declined 2.4% for the quarter primarily due to mix changes within the desktop product line. International sales in the quarter represented 15% of total Company sales. Sales in the Asia Pacific region were very strong relative to general market demand. Unit shipments increased over 70% and revenues were up approximately 33% compared to the prior year. This strong performance was partially offset by disappointing results from European operations, where revenues declined 22% compared to the prior year, because of declines in both unit shipments and AUPs. Gross margins in the quarter were 20.6%, a record high for the Company. The margin improvement over the first quarter level of 19.5% is primarily attributable to tactical product pricing decisions intended to help offset high marketing costs incurred during the quarter. In addition, gross margins were favorably impacted by the Your:)Ware initiatives, improved product mix, some greater than normal declines in component costs, and reductions in overall royalty and parts warranty costs. Selling General and Administrative (SG&A) expenses increased 38% over the second quarter of 1997, primarily due to increases in personnel and marketing expenses. SG&A expenses increased 10% over the first quarter of 1998 due to approximately $20 million of increased marketing investment behind the brand and Your:)Ware launch. Personnel costs in the quarter were essentially flat with the first quarter of 1998. As a result of favorable gross margins being offset by the abnormally high marketing expenditures in the quarter, operating income increased only 5.2% over the second quarter of 1997. Other Income increased to $10.9 million in the quarter, up from $9.3 million in the first quarter of 1998 and $6.4 million in the second quarter of 1997, due to additional interest income generated by increased balances of cash and marketable securities. Pre-tax income increased 10% to $94.9 million dollars and net income increased 8% to $60.7 million compared to $56.5 million in the second quarter of 1997. The Company's effective tax rate for the quarter was 36.0%, consistent with the first quarter rate, but an increase over the 34.5% effective tax rate in the second quarter of last year. The effective tax rate has increased over 1997 due to shifts in the geographic distribution of the company's earnings. Working capital management continued to improve as the Company's cash conversion cycle was reduced to just under 5 days. Inventory turns improved to over 30, an increase from the 26 achieved in the first quarter and an all time high for the Company. Accounts receivable days sales outstanding increased to 29 days due to a seasonal shift in the customer mix, but this was more than offset by an increase in accounts payable days outstanding. Cash and marketable securities were $892 million, a new record for the Company. Gateway CountrySM expanded with 15 new stores this quarter, bringing the total number of stores to 58. In addition, Gateway Country is expanding its training and service offerings in each of its stores. Business Outlook "Our plan is to build on the momentum generated in June during the second half of the year." said Waitt. "We will focus on increasing our consumer market share. We announced separately this week the addition of a new sales center in Salt Lake City where we will add 300 sales people by early fourth quarter. We will also expand our marketing initiatives into the business market, continue the aggressive expansion of Gateway Country and further strengthen Gateway's senior management team." Waitt said the current industry environment continues to be challenging and exciting. "Given the continued forecasted decline in average selling prices, it's obvious that companies need to be well positioned to adapt to market pressures. I feel that Gateway is strongly positioned to address that challenge head-on. The Company intends to continue its investments in marketing and branding to accelerate revenue growth while reducing operating expenses as a percentage of revenue." 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 (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. Gateway and the stylized Gateway logo are trademarks, and Your:)Ware is a service mark of Gateway. U.S. Industry Publications General Awards
Portables
Desktops
Servers
European Industry Publications United Kingdom
France
Germany
Sweden
Asia/Pacific Industry Publications Australia
Japan
South Asia
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