• Exits Year with $1.2 Billion in Cash and Marketable Securities

• Commits to long-term growth strategy

POWAY, Calif., Jan. 24, 2002 – Gateway Inc. (NYSE: GTW) today reported fourth quarter 2001 net income of $5.1 million or $0.02 per share on revenue of $1.1 billion, excluding the effects of an extraordinary gain.  Net income including the effects of the extraordinary gain relating to the company’s early extinguishment of its long-term debt was $9.4 million or $0.03 per share.

Gateway’s continued efforts to simplify its operations and reduce its cost structure, coupled with a shift to higher margin sales contributed to its profit during the quarter. 

"We said we'd return to profitability in the fourth quarter and we did," said Ted Waitt, Chairman and CEO.  "We made dramatic improvements against our key priorities for the year, controlled every lever of the business to deliver on that goal and managed our cost structure to the lowest absolute level it's been in years."

Gateway’s key accomplishments in 2001 included:

• Streamlining its cost structure.  Through restructuring and alignment initiatives the company has driven absolute SG&A to approximately Q4 1998 levels, when the company had half as many stores.
• Strengthening the balance sheet.  Gateway exited the year with almost double the cash and marketable securities position of the prior year,  no long-term debt and improved cash conversion metrics.
• Dramatically improving its product quality and customer satisfaction. Gateway increased its customer satisfaction scores based on its internal measures by 15 percent to an all-time high and continues to maintain this satisfaction level, while scores among competitors slip.  This was driven by a renewed focus on customer satisfaction and operational excellence, plus a simplified new product line which includes recommended configurations designed to better meet customers’ needs.  Currently about half of Gateway desktops sold are these recommended configurations.
• Re-establishing a technology leadership position.  The company led the industry  by being the first to market and ship systems pre-installed with the new Microsoft Windows XP operating system and was the most aggressive to market and sell cutting-edge Intel Pentium 4 and flat panel display technology, achieving a mix in the quarter of approximately 70 percent for both Windows XP and Pentium 4 and approximately 35 percent for flat panels.
• Advancing its solutions strategy.  With an industry-leading push in broadband through its exclusive nationwide network of retail stores, Gateway increased broadband subscribers by 250 percent sequentially in the fourth quarter alone and recently expanded its broadband services offer to more than half of its retail markets.

Domestic unit sales decreased 17 percent sequentially to 681,000.   Total unit sales, including discontinued international operations in the third quarter, declined by 24 percent sequentially.  While unit sales decreased, the company’s average unit price (AUP) increased to $1,667 during the quarter, compared to $1,574 for the third quarter, due to a shift in sales to higher-end systems, continued sales of beyond-the-box products and services and a lower level of sales discounting.

During the quarter the company’s government segment continued to show strength in a top three position.  In the consumer segment unit sales declined six percent sequentially, while the company increased its mix to higher-end, more profitable systems.  Unit sales for small and medium business and education declined sequentially 26 percent and 52 percent, respectively.

During the quarter, sales of non-PC products and services were 19 percent of revenue and 38 percent of gross margin dollars, with $115 million of revenue recorded at the point of sale and $95 million not at the point of 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 $1,527 for the quarter, up from $1,460 for the previous quarter.

The company’s gross margin for the fourth quarter was 21.2 percent, compared to 16.8 percent in the previous quarter, which excludes the impact of special charges.  Previous quarter gross margin, excluding special charges and international operations was 17.9 percent.  This increase is primarily the result of cost reductions, selling a mix of higher-margin products and services, and less sales discounting.

Due to the company’s continued focus on cost containment, Gateway’s selling, general and administrative (SG&A) expenses declined 27 percent to $240 million from $330 million the previous quarter, excluding special charges, representing an almost 50 percent decline from the year ago levels.  The SG&A decline was positively impacted by actions taken to streamline the company’s operations, including the closure of its company-owned international operations and other cost reduction efforts.

During the first quarter of 2002, Gateway continues to focus on cost reduction and alignment of its operations with its solutions strategy.  This has resulted in the closure of select company sites and other restructuring actions, which will require a special charge in the first quarter of 2002 in the range of $75 - $100 million, which is expected to generate annual savings of approximately $100 million.

Gateway reported full year 2001 revenue of $6.1 billion and a net loss of $1 billion or a loss of $3.20 per share.  Net loss excluding special charges amounted to $132 million or a loss of $0.41 per share. Total unit sales for the year were 3.6 million, a 28 percent decline over the prior year.

Gateway recorded domestic full year revenue of $5.5 billion with 3.2 million units sold. This represents a 33 percent and 24 percent year over year decline, respectively.

SG&A for the year was $2 billion versus $1.5 billion for 2000.  Excluding special charges and international operations, SG&A declined to $1.1 billion from $1.3 billion in 2000 primarily as a result of the company’s continued effort to streamline its cost structure that had significantly increased during the last half of 2000.

Gateway continued to strengthen its liquidity position during the fourth quarter ending the year with $1.2 billion in cash and marketable securities.  The company retired its long-term debt through the issuance of Series C redeemable convertible preferred stock, which resulted in an extraordinary gain of $4.3 million, net of taxes. The company also added $200 million to equity by issuing convertible preferred stock to America Online, Inc. for cash as part of the strategic alliance entered into in 1999.

The company intends to regain momentum by investing in its core PC business through the adoption of a more aggressive pricing and marketing strategy in 2002.  The company believes this strategy will significantly increase unit volume above levels otherwise anticipated.  At the same time, the company intends to continue to develop and refine its solutions business as a complement to the more aggressive PC pricing strategy.

Based on this strategy, the company expects to experience a pre-tax loss, before special charges, for the next few quarters while it regains market share in its core PC business.

Gateway’s strong liquidity position, cash flow profile and access to capital resources makes the company comfortable that this is a prudent strategy to achieve sustainable long-term profitability and market share growth.

"We plan to consistently execute this strategy through 2002 and exit the year as a robust, growing company with more than $1 billion in cash and an intensely satisfied customer base," said Waitt.

"We’ve made a lot of progress in 2001 and now it’s time to grow," continued Waitt.  "We have a great brand, a unique distribution model and the commitment to provide the best value to our customers for their technology solutions and that's exactly what we're going to do.  We have the liquidity and financial resources necessary to forgo short-term profits to regain long-term growth and sustainable profitability."

Gateway will host a conference call for analysts on Thursday, Jan. 24, 2002 at 5:30 p.m. EST.  The call will be accessible via live audio webcast at www.gateway.com.

Please also see the attached financial schedules.

Gateway (NYSE: GTW), a personal technology company, improves people’s lives through a combination of the latest and best hardware, communication tools, applications, training and service, all wrapped in a custom financing package.  The company takes a localized approach, utilizing its Web site, call centers and nationwide network of Gateway retail stores to build direct relationships with consumers, small and medium businesses and government and education institutions.  A Fortune 500(R) company founded in 1985, 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⁾. For more information, visit Gateway's Web site at www.gateway.com.

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 or preliminary estimates 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. Gateway 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.

(2) From the Harris Interactive Consumer TechPoll^SM study of 140,000 PC owners who use the Internet, released March 5, 2001.

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