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Press Release
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Gateway has restated its financial results for the first, second, and third quarter of 2000 and revised its reported results for the fourth quarter of 2000. Please refer to the company's February 28, 2001 announcement for updated results.
Gateway Posts Record Second Quarter Earnings
SAN DIEGO, July 13, 2000 – Robust year-over-year growth in PC sales to consumers, coupled with continued strong and increased sales of PC-related products and services, powered Gateway (NYSE: GTW) to record second quarter profits of $122 million, or $0.37 per diluted share, a 36 percent increase in net income over the second quarter of last year. During the second quarter, Gateway saw strong growth year over year in three of its four business units, with Gateway Consumer leading the way with revenue growth of 32 percent and unit growth of 39 percent. Gross margins for the quarter were a record 23.3 percent, showing the continued success of Gateway’s beyond-the-box business strategy in driving increasingly profitable sales of bundled hardware and services in an era of declining average unit prices. Income from hardware and services other than the PC was 40 percent of overall income in the second quarter, meaning Gateway has reached its previously stated goal for the fourth quarter a half-year ahead of schedule. “For the second time in two quarters, we have grown net income at triple the rate of our revenue growth, meaning we’re getting the lion’s share of profitable PC sales,” said Jeff Weitzen, Gateway president and chief executive officer. “As we enter the back half of the year, our biggest selling season, we’re positioned to help our clients reap all the benefits of today’s technology while driving profitable sales that our shareholders will applaud.” Quarterly Sales In the second quarter of 2000, Gateway sales rose to $2.14 billion, up 12 percent from year ago levels. Net income rose 36 percent year over year to $122 million. Gateway earned $0.37 per diluted share, compared with $0.28 per split-adjusted diluted share a year ago, a 32 percent increase. Gateway shipped 1.2 million units in the second quarter compared with 1 million units a year ago, a 17 percent increase. Propelled by growth across all sales channels, Gateway’s Consumer unit posted a 32 percent increase in revenues in the second quarter over year-ago levels, and a 39 percent increase in units. Improved availability of mid-range microprocessors, motherboards and DRAM allowed Gateway to better meet demand, as close rates exceeded historical trends. Gateway continued to grow its Internet service, along with its strategic partner America Online. By the end of the second quarter, Gateway and AOL had added a net 250,000 new subscribers. Gateway also showed strong growth overseas. Gateway’s Europe, Middle East and Africa (EMEA) unit saw revenues grow 21 percent year over year during the second quarter, marking a further strengthening of Gateway in Europe. Gateway’s Asia-Pacific (AP) unit saw revenues grow by 20 percent in the second quarter, compared with last year. Gateway’s sales to businesses declined 10% in the second quarter compared with last year as the company continued to refocus its efforts on sales to small and medium businesses and government and education institutions, which are Gateway’s core target markets in the business space. On a trend-line basis, however, Gateway’s business-to-business performance showed improvement over the previous quarter’s 19% decline, and the company is targeting flat growth in the third quarter and positive growth in the fourth. “We’re still not living up to the potential of our brand and our unique market position in the business-to-business-arena, but we’re moving in the right direction,” Weitzen said. “We’re redoubling our efforts to build capability and deliver world-class execution against our beyond-the-box strategy among our core business markets, and I’m confident we’ll see continued performance improvement in this sector in the quarters ahead.” The Gateway Country® stores retail channel added 31 stand-alone locations during the second quarter, bringing the total to 349 locations worldwide. In the United States, there were 27 new stores opened during the quarter, bringing the total to 287 locations. In EMEA, Gateway Country had 27 locations at quarter’s end. In AP, Gateway added four stores during the quarter, bringing the total to 35. In addition to Gateway Country stores, Gateway had another 409 Gateway store- within-a-store outlets around the world at the end of the second quarter. In EMEA alone, Gateway had 230 retail outlets in addition to Gateway Country stores at quarter’s end, an increase of 33 during the quarter. In AP, Gateway had 87 store-within-a-store outlets in addition to Gateway Country stores, up 39 from the end of the first quarter. In the U.S., Gateway had opened Gateway Country stores inside of 92 OfficeMax stores by quarter’s end, an increase of 80 during the quarter. This brings the total Gateway retail distribution total to 758 as of the end of the quarter. “As the original clicks-and-mortar PC retailer, we have understood since we were first selling PCs over the telephone that a significant portion of the populace, upwards of 60 percent, would rather touch the merchandise before buying,” Weitzen said. “One of the keys to our growth strategy going forward is to continue to invest in retail distribution that mirrors our direct business model and allows us to reach out to an ever greater population with not just hardware, but services such as training, financing and Internet access. Our innovative store-within-a-store concept allows us to do just that.” Operating Income Fueled by robust sales of beyond-the-box services, such as training and solutions bundles as well as strong PC unit growth, operating income for the second quarter rose to $169 million, a 37 percent increase over the second quarter of last year. For every PC sold to consumers, an average of four non-PC items, such as training, Internet service, solutions bundles and financing, were sold along with the system, a 67 percent increase over a year ago. “During the second quarter, Gateway’s operating income increased at a rate more than three times revenues due to productivity gains from Six Sigma projects, favorable component prices and acceleration of our beyond-the-box strategy,” said John Todd, senior vice president and chief financial officer. “Another key to second quarter earnings was that half of the 40 percent of income that came from beyond-the-box products and services was in the form of recurring income, our highest level of recurring income yet.” Selling, General & Administrative (SG&A) expenses were $330 million, down slightly as a percentage of sales in the second quarter versus a year ago. SG&A was 15.4 percent of sales in the second quarter versus 15.6 percent of sales a year ago. Gateway’s second quarter average unit price was $1,830, down only 4 percent from last year and down only 1 percent from the first quarter of 2000. Gross margins were a record 23.3 percent of sales, an increase of 130 basis points over last year and the tenth consecutive quarter of year-over-year margin improvement. Net Income Net income increased to $122 million, a 36 percent increase over year-ago levels. Earnings per diluted share increased 32 percent to $0.37, up from $0.28 per split-adjusted diluted share a year ago. The effective tax rate is 35.5 percent, down 0.5 percentage points from last year. Outlook Historically, the second half of the year is the strongest period for Gateway, from back-to-school through the December holidays. “As we move into our strongest selling season of the year, we’re planning to continue leveraging our beyond-the-box business model and distribution strategy to meet our goal of delivering consistent earnings results, better-than-industry growth rates and a more diverse and profitable revenue stream,” Todd said. During the second half of the year, Gateway expects to begin to offer the first of its family of Internet appliance products, which it is co-developing with AOL. The first device, a kitchen countertop appliance, will go on sale before the December holidays. Two other appliances are expected to follow in early 2001. Gateway also will continue to expand aggressively its number of distribution points through the balance of the year. By the end of the third quarter, all OfficeMax stores in the United States are expected to have a Gateway information and sales kiosk. Within one year, all OfficeMax stores are expected to have a complete Gateway Country store-within-a-store, staffed by a Gateway employee. 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 and other filings 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 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. In 1999, Gateway was seventh in total return to shareholders among Fortune 500 companies and tenth in total shareholder returns over the past five years. (2) 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 $8.65 billion in 1999 and shipped 4.68 million systems. For more information, visit our Web site at www.gateway.com (1) According to GartnerGroup/Dataquest US PC Quarterly statistics. (2) According to Fortune Magazine, April 17, 2000.
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