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Press Release
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Gateway Reports Second Quarter Results
Gateway had a pre-tax loss of approximately $9 million, or $0.02 per share in the second quarter, excluding the above-mentioned special charges and write-down, as well as income associated with the company's consumer loan portfolio currently held for sale. This compares to a pre-tax loss of approximately $6 million, or $0.01 per share in the first quarter, calculated on a consistent basis. The company's revenue performance in the quarter was reduced by its previously announced discontinuation of non-profitable revenue streams as well as the continuing slowdown in worldwide PC demand. At the same time, the company made significant improvement by reducing Selling, General and Administrative (SG&A) expenses, excluding special charges, by 19 percent from the previous quarter. In addition to its second quarter results, Gateway also announced today that it is embarking on a significant acceleration of its strategic shift to transform the company from a traditional manufacturer of PCs to a leading provider of personalized technology solutions by better leveraging Gateway's existing retail footprint, its powerful brand and its beyond-the-box solutions leadership. This acceleration starts immediately with the consolidation of the company's U.S. Consumer and Business operating units into one U.S. Markets organization and the formation of a new Solutions Group. It is estimated that the costs associated with this consolidation and restructuring would range from $15 to $20 million and would be accrued for in the third quarter as a special charge. As part of its effort to align the company and its cost structure against this accelerated strategic shift, Gateway is considering additional measures that could result in a significant restructuring of its worldwide operations and administrative functions. "We're making progress on our cost reduction efforts and we're seeing some solid gains in customer satisfaction and our efforts to target small business, government and education customers," said Ted Waitt, Gateway's founder, chairman and CEO. "At the same time, it's very clear to me that the industry is now going through a fundamental and permanent change in the way people buy technology. It's no longer technology for technology's sake. It's about how technology can improve people's lives and businesses. That shift is accelerating and we need to as well. We've done a lot to add capability over the past several years, now we need to fundamentally transform the underlying structure of our business. We plan to take aggressive steps to reorganize our company and be an industry leader as we've done at so many other points in our history." Quarterly Sales During the quarter the company focused on providing competitive pricing and launched the Gateway Guarantee, a promise to beat the price on comparably equipped national brand PCs. The program increased conversion dramatically throughout Gateway sales channels, while contributing to a lower average selling price (ASP). In addition, Gateway's customer satisfaction scores in the quarter continued their upward momentum. Gateway sold 923,000 units worldwide in the second quarter, down 21 percent year over year and down 16 percent from the first quarter of 2001. Unit sales to small and medium business grew 27 percent over the prior year, the company's second consecutive quarter of double-digit unit growth in this key segment. Gateway also saw 11 percent unit growth in its education segment, while its government segment grew units by three percent over the prior year. The challenging market environment, as well as the discontinuation of non-profitable revenue streams, had a negative impact on sales. Gateway's U.S. Consumer unit reported a decline of 36 percent in unit sales year over year. In Gateway's international operations, units declined 46 percent over the prior year in Europe, while its Asia Pacific unit reported units down 36 percent over the same period last year. Sales of non-PC products and services, which Gateway refers to as beyond the box, were 17 percent of revenue and 42 percent of gross profit for the quarter, with revenue of $144 million recorded at the point of sale, and $115 million after the sale. Gateway's average selling price (ASP), which is the sum of PC and non-PC products and services sold at the point of sale, was $1,501 for the quarter, compared to $1,723 in the first quarter. Pre-tax Loss The company's gross margin for the quarter was 18.7 percent, compared to 18.5 percent in the previous quarter before special charges and the $75 million operating loss associated with the consumer loan portfolio in the first quarter. Gross margin percentage in the quarter was positively affected by cost declines and the elimination of non-profitable revenue streams, which offset the discounting effect of the Gateway Guarantee program. Gateway's SG&A expenses in the second quarter were reported at $334 million including special charges. Excluding special charges, SG&A was down $74 million or 19 percent from the previous quarter, calculated on a consistent basis, to $309 million. The SG&A savings were realized through a combination of the strategic restructuring decisions announced in the first quarter, variable cost declines associated with lower sales volume, as well as other cost cutting efforts. Pre-tax loss in the quarter was impacted by a pre-tax charge to earnings of $44 million. This included the previously announced special charges for restructuring decisions made in the first quarter, which amounted to $24 million and are included in SG&A, as well as a $20 million investment write-down included in Other income, net. The other income charge was off-set by $23 million of income associated with the company's consumer loan portfolio currently held for sale. Balance Sheet Highlights Gateway continues its strong cash position, exiting the quarter with $1 billion in cash and marketable securities. Inventory turns remained steady at 28 times and the company generated a negative cash conversion cycle of two days. Personalized Technology Solutions, Local Relationships Gateway, the company that changed how consumers and businesses buy PCs in the '80s and '90s, today announced a dramatic acceleration of its long-stated strategy to become a leading provider of personalized technology solutions built on local relationships with its target customers. In essence, the company is taking its industry-leading beyond-the-box solutions capabilities to a new level, starting with the formation of a new Solutions Group that will focus on integrating hardware, software and services into personalized solutions that meet specific customer needs. This represents an aggressive shift for the company to a solutions focus, and will result in new integrated solutions for customers in key areas including communications, broadband, wireless, entertainment, financing, eBusiness and productivity. Bart Brown, formerly head of Gateway's Consumer operating unit, will lead this Solutions Group. Bob Burnett, senior vice president and chief technology officer, will continue to focus on developing leading hardware platforms working closely with Brown's team to integrate with the company's solutions. At the same time, the company will continue its efforts of improving hardware quality and reliability through further product simplification around specific hardware platforms in desktops, portables and servers across all customer segments. In addition, Gateway today announced a new go-to-market model that is based on a structure the company piloted in five U.S. markets during the second quarter. As part of this shift, Gateway will turn its 300 U.S. retail locations into local technology resource centers, serving as hubs for cross-functional sales, service and marketing teams that will provide customers with unparalleled personalization and local service and support. As a result, Gateway's Consumer and Business divisions will be combined, and the company's U.S. operations will be organized into three geographic regions, with sales and service representatives in the company's U.S. call centers being dedicated to territories within those regions. This new U.S. Markets group will be led by Susan Parks, senior vice president, U.S. Markets, who previously led Gateway's Business operating unit. Gateway's sales and marketing communications efforts will mirror this new personalized technology solutions strategy, with national TV and print advertising focused on building the profile of the overall Gateway brand and direct sales and marketing playing a key role in driving demand for Gateway's personalized technology solutions. "The transformation of Gateway will give our customers what they really want, namely technology solutions designed around their specific needs and delivered with a local, personal touch," Waitt said. "As a local business in the 133 U.S. markets in which we operate, we'll maintain a high level of visibility with nearby consumers, businesses, educational institutions and government offices. The entire customer experience will be tailored to individual needs, and delivered by top-notch Gateway people who'll be nearby whenever they're needed. More than ever before, Gateway customers will have a friend in the business." Outlook The company expects to approximately break even on a pre-tax income basis, excluding special charges, for the second half of 2001, based on current market conditions and outlook. The company expects unit volume to increase sequentially over the next two quarters, although it may not meet last year's levels. During the third quarter of 2001, Gateway estimates pre-tax special charges ranging from $25 to $30 million related to the strategic restructuring decisions previously announced in the first quarter, as well as those announced today. Gateway also said that cost-cutting steps will continue to have a positive effect on the level of SG&A expenses throughout the balance of the year. About Gateway Gateway (NYSE: GTW) a Fortune 500® company founded in 1985, focuses on building lifelong relationships with consumers, small and medium businesses and government and education institutions by helping clients meet all their technology needs. Gateway is ranked as the most admired American company in the Computers and Office Equipment industry in a Fortune Magazine survey (1) and is the top brand in customer loyalty and for first-time home computer purchases of Wintel-based PCs (2). The company had total global revenue of $9.6 billion in 2000. For more information, visit our Web site at www.gateway.com. Special Note This press release contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not materialize or prove incorrect, could cause Gateway's results to differ materially from those expressed or implied by such forward-looking statements. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including any projections of earnings, revenues, or other financial items; any statements of plans, strategies and objectives of management for future operations; any statements regarding proposed new products, services or developments; any statements regarding future economic conditions or performance; statements of belief and any statement of assumptions underlying any of the foregoing. The risks that contribute to the uncertain nature of these statements include, among others, competitive factors and pricing pressures, including the impact of aggressive pricing cuts by larger competitors; general conditions in the personal computing industry, including changes in overall demand and average selling prices, shifts from desktops to mobile computing products and information appliances and the impact of new microprocessors and operating software; the ability to transform the company to a technology solutions provider and restructure its operations and cost structure; component supply shortages; short product cycles; the ability to access new technology; infrastructure requirements; risks of international business; foreign currency fluctuations; ability to grow in e-commerce; risks of minority equity investments; risks relating to new or acquired businesses, joint ventures and strategic alliances; risks related to financing customer orders; changes in accounting rules, the impact of litigation and government regulation generally; inventory risks due to shifts in market demand; changes in product, customer or geographic sales mix; the impact of employee reductions and management changes and additions; and general economic conditions, and other risks described from time to time in Gateway's Securities and Exchange Commission periodic reports and filings. The Company assumes no obligation to update these forward-looking statements to reflect events that occur or circumstances that exist after the date on which they were made. (1) Fortune Magazine, "America's Most Admired Companies," February 19, 2001.
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