- Q4 revenue increases 6% to $2.45 billion

- Q4 margins hit record 22.3%

- Full-year revenue increases 16 percent to $8.6 billion

- Gateway exited 1999 with non-PC income topping 20%

- Gateway/AOL ISP subscriptions top 1 million

- Gateway solidifies position as number one seller of consumer PCs

SAN DIEGO, January 20, 2000 – Gateway, Inc. (NYSE: GTW) today announced fourth quarter and full-year results that illustrate the company’s continued success at managing margins and costs, leading the consumer PC market and building the foundation for a richer, more diverse revenue stream.

Strong demand for new PC offerings and increased sales of non-PC services and products pushed Gateway earnings to a record $428 million in 1999. The company reported full-year earnings per diluted share of $1.32, a 21.0 percent increase over 1998, on revenues of $8.6 billion, a 16 percent increase over year-ago annual revenues. The reported earnings include expenses of $26 million or $.05 per diluted share associated with the AOL transition, as previously announced, as well as a benefit from reducing the Company’s full year tax rate from 36 percent to 35.5 percent in the fourth quarter.

Gateway took aggressive steps in 1999 to diversify its revenue stream and become a pre-eminent provider of technology solutions to consumers and businesses, exiting the year with non-system income above 20 percent, which topped expectations.

Gateway’s fourth quarter results were negatively affected by supply issues and an unexpected slowdown in business-to-business sales due to Y2K concerns among large businesses and government and education institutions. Reported fourth quarter earnings were $126.0 million or $0.38 per diluted share, down 5.0 percent from last year. Excluding the expenses mentioned above and the benefit for the change in the effective tax rate, Gateway earned $139.3 million, or $0.42 per diluted share, on revenues of $2.45 billion.

“Our overall performance in 1999 was strong, and the progress we made against our beyond-the-box strategy positions us very well to meet our objective of delivering consistent results in 2000 and beyond,” said Jeff Weitzen, president and chief executive officer.

In 1999, Gateway took a number of significant steps to enrich and diversify its revenue stream beyond traditional PC sales and began showing strong early results against that strategy. In February, Gateway became the first PC maker to bundle its own Internet service with its PCs and launched an on-line software and peripheral store with more than 30,000 products. Through its more than 280 Country store locations worldwide, Gateway also accelerated its service and training offerings to consumers and small businesses.

In October, the company announced a wide-ranging relationship with America Online to accelerate distribution of each company’s products and services. By the end of 1999, after adding 400,000 new subscribers in the quarter, Gateway’s joint Internet service with AOL had more than one million subscribers. And, as previously announced, the company also increased its sales over the Internet by more than 100 percent over the previous year.

Gateway also took aggressive steps in 1999 to ramp up sales to small businesses and government and education institutions. The company built an out-bound sales force through its Country Stores and struck a wide-ranging alliance with GE Capital to target the large enterprise market with technology solutions. And, in a move that greatly enhances Gateway’s European business sales, the company entered into a two-year partnership with ComputaCenter, Europe’s leading IT systems and services company, allowing ComputaCenter to sell and support Gateway PC products throughout Europe.

Finally, the company entered into a number of partnerships and marketing alliances to further strengthen the Gateway brand in the consumer space. These include alliances with Fidelity Investments and Nickelodeon, as well as sponsorship of the 2002 Winter Olympic Games in Salt Lake City.

In the first three quarters of 1999, Gateway was the number one seller of PCs in the consumer market, and the company expects to remain the revenue share leader when industry analysts report fourth quarter numbers in the next several weeks.

“We came a long way in 1999 and built the foundation for a bright future,” Weitzen said.

Quarterly Sales

In the fourth quarter of 1999, Gateway shipped 1,361,296 units, an 18.3 percent increase from the fourth quarter of 1998. Sales increased 6.3 percent to $2.45 billion from $2.3 billion a year ago.

Despite continued pricing aggressiveness in the back half of the year, Gateway’s AUP’s increased from the third quarter to the fourth quarter to $1,801. More importantly, Gateway demonstrated continued improvements in managing margins, with gross margins for the quarter hitting a record 22.3 percent, up from 21.6 percent in the fourth quarter last year and up from 22.0 percent in the third quarter of 1999. This is the eighth consecutive quarter of year-over-year margin improvement.

“We promised to bring a new level of discipline and focus to our margin management,” said John Todd, Chief Financial Officer. “In the face of aggressive competition from low-priced entrants across all segments of our business, we have continued to deliver on the promise quarter after quarter.”

We exited the year with 280 Gateway Country locations worldwide, an increase of 49 stores during the fourth quarter. In the U.S., Gateway has 227 locations; in Europe, there are 27 locations and in Asia-Pacific, there are 26 locations. Gateway plans to open more than 100 new stores worldwide during 2000, including more than 75 in the United States alone.

Full-Year 1999 Sales

Gateway shipped 4,685,065 million units in 1999, a 32.3 percent increase over 1998. Sales increased to $8.65 billion, a 15.8 percent increase over 1998 levels. Gateway’s Consumer unit had a strong 1999, successfully launching several new PCs, including the Gateway Profile, Gateway Profile II and Gateway Astro all-in-one systems. The Astro, which starts at $799, accounted for 20 percent of Gateway’s consumer mix by year-end.

Selling, General & Administrative (SG&A) Expenses

As Gateway continued to invest in long-term, strategic initiatives, reported fourth quarter and full year SG&A expenses were $374.7 and $1.3 billion, respectively. Excluding the AOL transition expenses, the company’s adjusted SG&A for the fourth quarter was $348.7 million, or 14.2 percent of sales, a 12.3 percent increase over the fourth quarter of 1998. The transition expenses include ISP technical support, back-office and subscriber transition costs, development costs and deal-related fees and expenses.

Operating Income

Reported fourth quarter operating income was $173.2 million, down 7.7 percent over the prior year. Full year reported operating income was $595.7 million, up 20.5 percent over 1998. Excluding the aforementioned transition expenses, fourth quarter operating income was $199.2 million, up 6.1 percent from year-ago levels. Adjusted full-year operating income was $621.7 million, a 25.8 percent increase over 1998.

Net Income

For 1999, net income was $427.9 million and $1.32 per diluted share, up 21.0 percent over the prior year on a per split-adjusted basis. Excluding the previously announced expense associated with the AOL alliance, net income for the fourth quarter was $143.1 million, an increase of 10.8 percent from a year ago. Adjusted net income for 1999 increased to $444.7 million, a 28.4 percent rise over 1998. Adjusted earnings per diluted share for the fourth quarter were $0.43, up 6.9 percent from last year. The effective tax rate for the quarter was 34.3 percent, down from 36 percent in the fourth quarter of 1998. For the full year, the tax rate was 35.5 percent, down 0.5 percentage points from 1998.

Cash and Marketable Securities

Gateway generated $304.5 million in operating cash for the quarter, exiting 1999 with cash and marketable securities of $1.34 billion. Inventory turns increased again to 41.9 in 1999 compared to 39.5 a year ago. The cash conversion cycle remains strong at negative 10.1 days, a 5.2-day improvement over last year.

Business Outlook

Last week, Gateway added breadth and depth to its supplier base and product offerings by launching a new line of consumer and small business desktop PCs powered by AMD’s Athlon processors. The new Gateway Select PCs provide an optimal balance of high-performance features and price, with the power of choice.

Weitzen also said that Gateway remains comfortable with analyst consensus estimates for the first quarter and full-year 2000.

“The environment in which we’re operating is tough and getting tougher, which means we have a lot of work to do to achieve our aggressive plans,” Weitzen said. “We’re confident that our existing product and marketing plans for the year, coupled with even better execution in the marketplace, will allow us to deliver on our commitments to shareholders this year and beyond. So far this quarter, call volume and traffic to our Web site and stores remains strong, our business fundamentals are sound and our beyond-the-box strategy positions us extremely well for the future.”

Annual Meeting

The 2000 Annual Meeting of shareholders of Gateway will be held on May 18, 2000, at the Sioux City Convention Center, 801 Fourth Street, Sioux City, Iowa, at 9:00 a.m. local time.

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 joint ventures; 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 PC revenue in the first, second and third quarters of 1999 (1) and was rated among the top ten best corporate reputations in America according to a survey conducted in August of 1999 by Harris Interactive and the Reputation Institute and published in The Wall Street Journal.

Gateway employees worldwide provide 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.

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