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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 Third Quarter Earnings
SAN DIEGO, Oct. 12 -- Continued strong growth in sales to consumers and small businesses coupled with continued growth in Europe propelled Gateway (NYSE: GTW) to record third quarter profits of $152.6 million on revenues of $2.53 billion, or $0.46 per diluted share, a 35 percent increase in net income over the third quarter of last year. Gateway recorded growth in all four business units during the third quarter of 2000, with Consumer leading the way with a 27 percent revenue increase. Gross margins for the quarter were 23.1 percent, showing the continued success of Gateway's beyond-the-box business strategy in powering increasingly profitable sales of bundled hardware, software and services. Income from hardware, software and services other than the PC was more than 50 percent of income in the third quarter, which exceeded Gateway's fourth quarter target by five percentage points. "The real message of our third quarter results is that while most of our traditional competitors remain focused on hardware, Gateway is realizing its goal of becoming a company that acts as a solutions provider, showing millions of clients worldwide how to get more from their technology," said Jeff Weitzen, Gateway president and chief executive officer. "We are not a pure-play PC maker anymore and our results last quarter prove the point." In the third quarter, Gateway accelerated year-over-year revenue growth to 16 percent, up from 12 percent in the previous quarter. From a profit perspective, this was Gateway's third consecutive quarter of 30-percent-plus net income and earnings-per-share (EPS) growth. For the first three quarters of 2000, Gateway has recorded average diluted EPS growth of 32 percent, versus a consolidated average of 20 percent for its competitors during the same period. "The combination of accelerating revenue and profit growth that leads the traditional PC industry further illustrates the differences in the Gateway business model," said John Todd, Gateway chief financial officer. Quarterly Sales In the third quarter of 2000, Gateway sales rose to $2.53 billion, up 16 percent from year-ago levels. Net income rose 35 percent year over year to $152.6 million. Gateway earned $0.46 per diluted share, compared with $0.35 per diluted share a year ago, a 31 percent increase. Propelled by growth across all sales channels, Gateway's Consumer unit posted a 27 percent increase in revenues in the third quarter over year-ago. Gateway continued to grow its Internet service, along with its strategic partner America Online. By the end of the third quarter, Gateway and AOL had added more than 300,000 net new subscribers, bringing the total to more than 1.7 million subscribers. Additionally, Gateway launched a nationwide campaign in the United States during the third quarter to show consumers and small business owners how to get more from their existing technology and how new technologies can help change their lives. Under the new tagline "People Rule," this massive effort included a new multi-media advertising campaign as well as a grassroots effort to offer free clinics and "ask-a-tech" sessions through Gateway's more than 300 Country stores. The company also launched new solutions bundles that included software, hardware and training around such applications as digital photography, music, personal finance and Internet browsing. "Our research told us that our clients were growing increasingly frustrated with new technology because that technology was just not as easy to use as the industry had led them to believe," Weitzen said. "At Gateway, we're carving out a unique place in the industry with the ability to fulfill against a promise that others are trying to make." Gateway also showed continued growth overseas. Gateway's Europe, Middle East and Africa (EMEA) unit outgrew the market there in the third quarter, with revenues rising 13 percent year over year, marking a further strengthening of Gateway in Europe. Gateway's Asia-Pacific (AP) unit saw revenues grow by 8 percent in the third quarter, compared with last year. Gateway's sales to businesses increased 2 percent in the third quarter compared with last year, propelled by a refocusing on sales to small and medium sized businesses, government and education institutions. During the third quarter, Gateway Business improvement was driven by a doubling of the number of business sales representatives servicing small business in Gateway Country stores and enhanced business products and solutions, training, and local service support through the Gateway Networking Solutions Program. In addition to rolling out DSL Internet access and web hosting earlier this year, Gateway Business also laid plans during the quarter for a further ramping up of beyond-the-box offerings for its target clients. Small Business beyond-the-box services contributed four cents of EPS this quarter, with nearly two thirds of that recurring each quarter. The Gateway Country® stores retail channel added 35 stand-alone locations during the third quarter, bringing the total to 384 locations worldwide. In the United States, there were 24 new Gateway Country stores opened during the quarter, bringing the total to 311 locations. Gateway Country also opened four stores in Canada during the third quarter. In EMEA, Gateway Country had 27 locations at quarter's end. In AP, Gateway added seven stores during the quarter, bringing the total to 42. In addition to Gateway Country stores, Gateway had another 669 Gateway store-within-a-store outlets around the world by the end of the third quarter. In EMEA alone, Gateway had 275 retail outlets in addition to Gateway Country stores at quarter's end, an increase of 45 during the quarter. In AP, Gateway had 100 store-within-a-store outlets in addition to Gateway Country stores, up 13 from the end of the second quarter. In the U.S., Gateway had opened staffed Gateway Country stores inside of 294 OfficeMax stores by quarter's end, an increase of 202 during the quarter. Profitability Selling, General & Administrative (SG&A) expenses were $364.5 million, down slightly as a percentage of sales in the third quarter versus a year ago. SG&A was 14.4 percent of sales in the third quarter versus 14.7 percent of sales a year ago. Gross margins were 23.1 percent of sales, an increase of 1 percentage point over last year and the 11th consecutive quarter of year-over-year margin improvement. Net Income Net income increased to $152.6 million, a 35 percent increase over year-ago levels. Earnings per diluted share increased 31 percent to $0.46 per diluted share, up from $0.35 per diluted share a year ago. Outlook Historically, the fourth quarter of the year has been the strongest period for Gateway. "The fourth quarter is traditionally our strongest selling season of the year," said Todd. "We're planning to continue leveraging our beyond-the-box model, in Gateway Consumer, Gateway Business and internationally, as well as our ever-strengthening distribution network to meet our goal of delivering consistent earnings results, better-than-industry growth rates and a more diverse and profitable revenue stream." During the fourth quarter, 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 in time for the December holidays. Gateway also will continue to expand aggressively its number of distribution points. Later this quarter, SEC Regulation FD will go into effect. In order to ensure Gateway remains in compliance with SEC regulations regarding public disclosure, the company today established new internal guidelines regarding certain information and ways it plans to publicize that information so that all investors have a fair chance to use it to make investment decisions. Today's financial results announcement reflects the new Gateway guidelines. Gateway also announced an accounting change for the fourth quarter. As a result of EITF 00-10, Accounting for Shipping and Handling Revenues and Costs, freight charges billed to customers will be included in net sales and the related expense in cost of goods sold. This reclassification will have no impact on net income or EPS. Gateway expects to release revised historical quarterly information reflecting this reclassification in the next several weeks. Conference Call Gateway's quarterly conference call, led by President and CEO Jeff Weitzen and Chief Financial Officer John Todd, will be accessible today via live audio webcast at 5:30 PM ET/2:30 PM PT at 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; 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. For more information, visit our Web site at www.gateway.com (1) According to GartnerGroup/Dataquest US PC Quarterly statistics.
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