IRVINE, Calif., May 8 /PRNewswire-FirstCall/ -- Gateway, Inc. (NYSE:
GTW) today reported results for its first quarter ended March 31, 2007.
Revenue amounted to $1.009 billion, down from $1.021 billion in the fourth
quarter of 2006 and compared to $1.078 billion a year earlier.
The company recorded a first quarter net loss of $8.6 million, or 2
cents per diluted share. This compares with net income of $11.5 million, or
3 cents per diluted share in the prior quarter, and a net loss of $12.3
million, or 3 cents per diluted share a year earlier.
"We accomplished much in the first quarter, even as many of the
challenges facing the company remain evident," said Ed Coleman, Gateway's
chief executive officer. "We narrowed operating and net losses from last
year and increased U.S. market share sequentially, while at the same time
making significant improvements to our expense structure. In addition,
Gateway successfully transitioned its consumer products to Microsoft
Windows Vista, introduced new PC and server products and refreshed the look
and feel of much of our product line. While these new product introductions
and the implementation of a new ERP system resulted in additional costs
that impacted first quarter financial performance, our consumer business
bucked seasonal trends to increase revenue from last year's fourth quarter.
And our focus on improving profitability in our professional business
yielded sequential and year-over-year improvement in professional gross
margin and contribution dollars."
Overall Performance
The company sold 1,251,300 PC units in the first quarter, down 3
percent sequentially and down 9 percent year-over-year. Based on
preliminary IDC data, Gateway was the third largest PC company in the U.S.
with an estimated 7.2 percent market share in the first quarter, up from
6.6 percent in the prior quarter. Among the top three vendors, Gateway was
the only company to experience sequential unit growth in the U.S. in the
first quarter.
Gross margin for the first quarter was 4.9 percent, compared with 5.2
percent in the prior quarter and 7.3 percent in the first quarter of 2006.
The sequential decrease is due to lower margins in the Direct segment,
partially offset by improvements in the Professional and Retail segments.
The year-over-year decline in gross margin is due to lower margins in the
Direct and Retail segments partially offset by improvement in the
Professional segment, and a continued mix shift towards the Retail segment,
which historically has lower margins.
SG&A expense in the first quarter was $65.1 million, or 6.5 percent of
revenue, down from $65.4 million in the prior quarter, and down from $103.1
million (including $0.5 million of restructuring expenses) in the first
quarter of 2006. The year-over-year decrease consists primarily of
reductions in settlement expenses and legal fees, headcount and
recruiting-related savings, and reduced marketing expenses partially offset
by an increase in depreciation expense related to the January 1st
implementation of a new ERP system.
As part of Gateway's 2005 Marketing, Development and Settlement
Agreement with Microsoft, first quarter results included the continuing
quarterly benefit of $8.6 million.
First quarter operating income equaled a loss of $6.7 million. This
compares to a loss of $4.1 million in the prior quarter and a loss of $15.7
million a year earlier.
Segment Results
The Retail segment, which includes international sales, delivered first
quarter revenue of $766.3 million, up 2 percent sequentially and
essentially flat year-over-year. Retail PC unit sales equaled 1,092,700,
down 2 percent sequentially and down 6 percent year-over-year. The
sequential and year-over-year decrease in units reflects a shift to higher
opening price points. U.S. channel inventories remained tight, at under
four weeks. The sequential increase in revenue reflects product and brand
mix changes within the segment, resulting in a higher average unit price.
Retail gross margin in the first quarter was $23.6 million or 3.1
percent of revenue, up from $22.1 million or 2.9 percent of revenue in the
prior quarter, and down from $47.6 million or 6.2 percent of revenue in the
first quarter of 2006. Retail segment contribution was $19.0 million (after
Retail SG&A expenses of $4.6 million), up from $17.1 million in the prior
quarter (after expenses of $5.0 million) and down from $41.1 million a year
ago (after expenses of $6.5 million). The sequential improvement in gross
margin and segment contribution is primarily due to product and brand mix
changes within the segment. The year-over-year decline in gross margin and
segment contribution is primarily due to competitive pricing pressure,
expedited freight costs and increased devaluation costs on refurbished
products, partially offset by reduced advertising expenses.
The Professional segment delivered revenue of $155.7 million in the
first quarter, down 14 percent sequentially and down 23 percent
year-over-year. Professional PC unit sales equaled 111,800, down 17 percent
sequentially and down 29 percent year-over-year. The sequential and
year-over-year decreases in revenue and unit sales were predominantly due
to continuing competition within the segment and greater selectivity in
contract bidding.
Professional gross margin was $10.8 million or 6.9 percent of revenue,
up from $9.1 million or 5.1 percent of revenue in the prior quarter and up
from $7.7 million or 3.8 percent of revenue in the first quarter of 2006.
Professional segment contribution was a loss of $3.0 million (after
Professional SG&A expenses of $13.8 million), up from a loss of $4.2
million in the prior quarter (after expenses of $13.3 million) and up from
a loss of $12.2 million a year ago (after expenses of $19.9 million). The
sequential and year over year improvements in gross margin and segment
contribution were due to management's decision to pursue opportunities on a
more selective basis, resulting in better margin management, as well as
reduced headcount-related expenses.
The Direct segment delivered revenue of $86.7 million, up 2 percent
sequentially and down 20 percent year-over-year. Direct PC unit sales
equaled 46,700, up 16 percent sequentially and down 20 percent
year-over-year. The sequential increase in units reflects a positive
response to recent product offerings. The sequential increase in unit
volume did not result in the same level of revenue growth due to a lower
average unit price combined with declining deferred extended warranty
revenue and Internet access subscription revenue share. The year-over-year
declines in units and revenue reflect significant sales of refurbished
product in the year ago period and lower small business unit sales, as well
as declining deferred extended warranty revenue and Internet access
subscription revenue share.
Direct gross margin was $15.3 million or 17.7 percent of revenue, down
from $21.5 million or 25.3 percent of revenue in the prior quarter and down
from $23.5 million or 21.6 percent of revenue in the first quarter of 2006.
Direct segment contribution was $8.7 million (after Direct SG&A expenses of
$6.6 million), down from $16.2 million in the prior quarter (after expenses
of $5.2 million) and down from $9.5 million a year ago (after expenses of
$13.9 million). The sequential decline in gross margin and segment
contribution reflects declining deferred extended warranty revenue and
Internet access subscription revenue share, as well as a one-time credit
received in the prior quarter for a refund of value-added and payroll taxes
related to discontinued international operations. The year-over-year
decline in gross margin and segment contribution reflects declining
deferred extended warranty revenue and Internet access subscription revenue
share, partially offset by reduced headcount-related and brand marketing
expenses.
Working Capital
Working capital at the end of the quarter was $228 million prior to the
adjustment for FIN 48, down from $232 million at the end of 2006. Invoicing
and settlement delays associated with implementation of the company's new
ERP system caused certain working capital accounts to increase short term.
Net accounts receivable closed at $303 million, (27 days sales
outstanding), up from $275 million (25 days) at the end of 2006. Net
inventory closed at $131 million (12 days inventory on hand) up from $97
million (9 days) at the end of 2006. Accounts payable and supplier
receivables both increased to $860 million (81 days) and $478 million (45
days), respectively, up from $613 million (58 days) and $247 million (23
days) at the end of 2006 due to invoicing and settlement delays associated
with implementation of the company's new ERP system. Accounts payable, net
of supplier receivables, increased to $382 million (36 days) from $365
million (35 days) at the end of 2006. During the quarter, Gateway adopted
FIN 48, which resulted in a reclass of $86 million of tax provision from
current to long term liabilities and increased ending working capital to
$314 million.
Cash and marketable securities decreased to $317 million from $416
million at the end of 2006. This decline primarily resulted from a $28
million increase in accounts receivable, a $33 million increase in
inventory, a $27 million increase in other current assets and a $231
million increase in supplier receivables that was offset by a $248 million
increase in accounts payable. Gateway expects cash to stabilize in the
second quarter for the following reasons: Gateway expects inventory and
other current assets (rebates) to decrease to levels at the end of 2006.
Supplier receivables and accounts payable have dropped significantly now
that the invoicing delays are behind us. Lastly, capital expenditures will
be lower than depreciation and amortization for the remainder of the year.
At the end of the first quarter, Gateway had approximately $84 million
in income tax reserves attributable to past periods. Gateway is in the
process of concluding audits of these past periods and believes that a
significant portion of these reserves will be released over the next few
quarters which would benefit its reported net income.
Conference Call Information
Gateway will host a conference call for analysts on Tuesday, May 8 at
5:30 p.m. EDT/2:30 p.m. PDT, which will be accessible via live audio web
cast at http://www.gateway.com.
About Gateway
Since its founding in 1985, Irvine, Calif.-based Gateway (NYSE: GTW)
has been a technology pioneer, offering award-winning PCs and related
products to consumers, businesses, government agencies and schools. Gateway
is the third largest PC company in the U.S. and among the top ten
worldwide. The company's value-based eMachines brand is sold exclusively by
leading retailers worldwide, while the premium Gateway line is available at
major retailers, over the web and phone, and through its direct and
indirect sales force. See http://www.gateway.com for more information.
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 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; the extent of seasonal changes in demand;
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, risks related to shifting our
distribution model to third-party retail; 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
simplify the company's business, change its distribution model 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; 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; 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 any forward-looking statements to
reflect events that occur or circumstances that exist after the date on
which they were made.
Gateway, Inc.
Consolidated Condensed Statements of Operations
(in thousands, except per share amounts)
(unaudited)
Three months ended March 31,
2007 2006
Net sales $1,008,703 $1,077,882
Cost of goods sold 958,984 999,094
Gross profit 49,719 78,728
Selling, general, and administrative expenses 65,083 103,096
Microsoft benefit 8,625 8,625
Operating loss (6,739) (15,743)
Other income, net 706 2,237
Minority interest (29) --
Loss before income taxes (6,062) (13,506)
Provision for income taxes (2,517) (1,170)
Net loss attributable to common stockholders $(8,579) $(12,336)
Net loss per share:
Basic $(0.02) $(0.03)
Diluted $(0.02) $(0.03)
Weighted average shares outstanding:
Basic 371,598 372,982
Diluted 371,598 372,982
Gateway, Inc.
Consolidated Condensed Balance Sheets
(in thousands)
(unaudited)
March 31, 2007 December 31, 2006
ASSETS:
Current assets:
Cash and cash equivalents $287,184 $345,677
Marketable securities 30,289 70,658
Accounts receivable, net 303,020 274,782
Inventory, net 130,616 97,187
Other 735,257 462,789
Total current assets 1,486,366 1,251,093
Property, plant, and equipment, net 108,249 110,931
Intangibles, net 71,970 75,058
Goodwill and non-amortizable intangible
assets 205,219 205,219
Other assets 10,231 13,934
$1,882,035 $1,656,235
LIABILITIES AND EQUITY:
Current liabilities:
Accounts payable $860,471 $612,639
Accrued liabilities 191,314 230,115
Accrued royalties 85,142 54,521
Other current liabilities 35,178 121,659
Total current liabilities 1,172,105 1,018,934
Long-term debt 300,000 300,000
Other long-term liabilities 149,387 65,875
Total liabilities 1,621,492 1,384,809
Minority interest 2,447 2,418
Stockholders' equity 258,096 269,008
$1,882,035 $1,656,235
Gateway, Inc.
Consolidated Condensed Statements of Cash Flows
(in thousands)
(unaudited)
Three months ended March 31,
2007 2006
Cash flows from operating activities:
Net loss $(8,579) $ (12,336)
Adjustments to reconcile net cash to
net cash provided by operating activities:
Write-down of long-lived assets -- 479
Depreciation and amortization 12,669 6,884
Provision for doubtful accounts receivable 2,225 783
Stock-based compensation 678 1,074
Loss on investments 48 36
Loss on sale of property, plant and equipment 1 2
Other, net -- (529)
Changes in operating assets and liabilities
Accounts receivable (32,239) (8,043)
Inventory (33,429) 37,329
Other assets (266,988) 26,452
Accounts payable 247,500 (48,132)
Accrued liabilities (30,474) 37,368
Accrued royalties 30,621 (10,696)
Other liabilities (5,769) (21,020)
Net cash (used in) operating activities (83,736) 9,651
Cash flows from investing activities:
Proceeds from sales of available-for-sale
securities, net 56,766 44,359
Purchases of available-for-sale securities (16,297) (13,032)
Purchases of property, plant and equipment (15,226) (9,190)
Proceeds from sale of property, plant
and equipment -- 3,731
Net cash provided by investing activities 25,243 25,868
Cash flows from financing activities
Proceeds from common stock exercises -- 5
Net cash provided by financing activities -- 5
Net (decrease) increase in cash and cash
equivalents (58,493) 35,524
Cash and cash equivalents, beginning of period 345,677 422,488
Cash and cash equivalents, end of period $287,184 $458,012
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Minority interest in earnings $29 $--
Value of restricted shares withheld for taxes $311 $2,690
SUPPLEMENTAL CASH FLOW INFORMATION
Cash received for income taxes, net $96 $--
Cash paid for interest $298 $22
SOURCE Gateway, Inc.
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Related links:
http://www.gateway.com
CONTACT:
Media, David Hallisey, +1-949-471-7703,
david.hallisey@gateway.com, or Investors, Marlys Johnson,
+1-605-232-2709, marlys.johnson@gateway.com, both of Gateway,
Inc.
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