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Press Release
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Gateway Reports Record Second Quarter Earnings
· Earnings Increase 47% to $.56 Per Diluted Share SAN DIEGO, July 22, 1999 - Powered by strong growth across virtually all segments of its core PC business -- and an increasingly diverse and profitable revenue stream -- Gateway (NYSE: GTW) today announced record second quarter earnings of $89 million, or $.56 per diluted share, a 47 percent increase over year-ago levels. Ted Waitt, Gateway's Chairman and Chief Executive Officer, attributed the strong showing to robust demand in Gateway's consumer PC business, continued strength in the company's Asia-Pacific operations, renewed growth at Gateway Business and a rapidly-expanding and growing revenue stream beyond the company's core PC business. "We continue to focus like a laser on executing our strategy of moving beyond the box, and it paid off with a record quarter in what's typically the industry's slowest period," Waitt said. "Non-PC income is now well over 10%, which is where we said we'd be by year-end. Clearly, we're well ahead of our plan to generate a richer, more diverse revenue stream, while our core systems business has never been healthier." Most notable in that regard was the rapid growth of Gateway.net, the Company's internet service provider (ISP), which it launched in 1997 and began bundling with most computers in February this year. Gateway.net subscribers doubled to over 400,000, making Gateway the fastest growing major ISP. "A world-class, scalable ISP continues to be the backbone of our strategy to forge lifelong relationships with consumers and businesses," Waitt said. "And with the rapid expansion of Gateway.net, we're poised to drive highly profitable growth across all sectors of the Internet value chain well into the future." In the second quarter of 1999, Gateway shipped 1,003,900 units, a 36% increase from the second quarter of 1998. Sales increased 18% to $1.9 billion from $1.6 billion a year ago. Net income increased 47% to $89.2 million or $.56 per diluted share, compared to $60.7 million or $0.38 per diluted share in the second quarter of 1998. Gateway's half-year results reflect very strong performance in an intensely competitive environment that has seen weakness among some competitors. Unit shipments were up 39% for the first six months versus last year, net income increased 38% and revenues were up 20%, with earnings increasing 37% to $1.18 per diluted share. Quarterly Sales Strong growth in the U.S. for the quarter was driven by continuing strength in Gateway's consumer segment and a record quarter for Gateway's business segment. In the U.S., units increased 36% year over year, with revenues up 18%. Gateway's U.S. consumer segment posted a healthy 46% unit increase over the same period last year, with revenues up 25%. Gateway's U.S. business segment is clearly responding to the new marketplace initiatives and programs the company has launched this year, such as Your:)Ware for Business and dedicated sales and service capabilities in Gateway Country locations throughout the U.S. Gateway Business posted a strong 30% increase in units for the second quarter over the same period last year, with revenues up 12% to a record $878 million. Overall, momentum behind Gateway's total U.S. business continues to mount, as evidenced by a record backlog at the end of the quarter that the company is now meeting at a rapid pace. Overseas, Gateway's Asia business continued its rapid growth, while Europe continued to show signs of a turnaround. In Asia, Gateway posted robust unit volume growth of 77% in the second quarter versus the same period last year, and revenue growth of 58%. Asia's strong showing was driven by healthy growth across all markets and channels, with Japan, once again, posting significant revenue and unit growth far exceeding the industry pace. Europe's unit growth was up slightly, while revenue declined 14% for the quarter over the same period last year. As with the first quarter, however, the United Kingdom's consumer segment responded well as Gateway continued to execute its global strategy, showing healthy unit growth of 20% for the second quarter versus last year, with revenues up 8%. Average unit prices (AUP's) declined 13% from a year ago to $1905 and declined less than 2% from the first quarter of 1999. More importantly, gross margins for the quarter were 22.0%, up from 20.6% last year and up 60 basis points from the first quarter of 1999, marking Gateway's sixth consecutive quarter of year-to-year margin improvement. Gateway Country® stores expanded to 168 locations in the U.S. with the addition of 14 new sites in the second quarter. "The tail end of the quarter saw a huge up-tick in demand, as evidenced by our backlog moving into July," said Jeff Weitzen, President and Chief Operating Officer. "We've never ended a quarter with stronger momentum and better control over each of our growth levers. As we near our biggest selling season at the end of the year, we're confident that our world-class execution will continue to drive stellar results." 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 spending reduction in SG&A versus the first quarter. SG&A spending totaled $298.5 million or 15.6% of sales for the second quarter, versus $249.7 million or 15.4% of sales for the same period last year, and down from the first quarter levels of $309.7 million or 14.7% of sales. Operating Income Operating income for the second quarter rose to $122.9 million, a 46% increase over last year. Other income increased 51% to $16.5 million compared to $10.9 million in the second quarter of last year, primarily due to increased interest income. Net Income Net income increased to $89.2 million or 47% compared to last year's second quarter level of $60.7 million. Earnings per diluted share increased 47% to $.56 from $.38 per diluted share a year ago. The effective tax rate remains at 36%. Cash and Marketable Securities Gateway generated $99 million in operating cash for the quarter, ending the quarter with cash and marketable securities at $1.228 billion, down slightly from the first quarter of the year as the company invested cash in strategic initiatives like its stock repurchase program and its financing business. Inventory turns increased again this quarter to 42 compared to 30 a year ago. The cash conversion cycle remains strong at negative 7 days, a 12-day improvement over last year and a 4-day improvement over the first quarter. Business Outlook "As we move into our strongest selling season of the year, we're poised to continue delivering consistent earnings results, better-than-industry growth rates and a more diverse and profitable revenue stream," said John Todd, Senior Vice President and Chief Financial Officer. 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; component supply shortages; risks relating to new or acquired businesses; 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 250 company founded in 1985, focuses on building lifelong relationships with consumers and businesses through complete technology personalization. Gateway ranked number one in U.S. consumer desktop PC sales in the first quarter of 19991 and number one in customer loyalty.2 Our employees worldwide serve clients with services and built-to-order computers that consistently win top awards from leading industry publications. Gateway had total global revenue of $7.5 billion in 1998 and shipped 3.54 million systems. For more information, visit our Web site at www.gateway.com. 1. According to GartnerGroup/Dataquest US PC Quarterly statistics. U.S. Industry Publications Portables
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