- Q2 net profit was $17.2 million, or $0.05 per share, on revenue
of $873 million
- First GAAP profit from operations after 13 consecutive quarters
of GAAP net losses; fourth consecutive quarter of non-GAAP profit
- Sequential U.S. market share growth, according to initial IDC and
NPD data
- SG&A down significantly year-over-year
IRVINE, Calif., Aug. 15 /PRNewswire-FirstCall/ -- Gateway, Inc.
(NYSE: GTW) today reported results for its second quarter ended June 30, 2005.
The company recorded a second quarter net profit of $17.2 million, or 5
cents per share, compared with a loss of $5 million, or 1 cent per share in
the prior quarter, and a net loss of $339 million, or 91 cents per share a
year earlier. The company recorded restructuring, transformation and
integration costs of $1 million in the second quarter of 2005, compared with
$8 million in the first quarter and $289 million in the second quarter of
2004.
Revenue amounted to $873 million, compared with $838 million in the first
quarter and $838 million a year earlier. The results do not include
approximately $25 million of products forecasted to be received by the end of
the quarter, but which were still in transit as of June 30, 2005.
"While we had to contend with gross margin pressure in all our major
business units in the second quarter due to competitive pressures, our
performance shows we remain on track toward our long-term growth goals and
that we continue to make important strides through our highly scalable, low-
overhead model," said Wayne Inouye, president and chief executive officer.
"While we have much work to do, we continue to believe we have a model of
operational efficiency and customer intimacy that is a winner over the long
term."
In the second quarter, Gateway's operating income included $15.1 million
of benefits related to an April 2005 marketing, development and settlement
agreement with Microsoft Corp. As part of the agreement, Gateway is required
to use a substantial majority of the proceeds to fund various marketing and
promotional initiatives, including advertising, sales training and consulting,
as well as the research, development, and testing of new Gateway products that
run Microsoft products. Consistent with these requirements, Gateway made
$15.1 million of qualifying expenditures in the second quarter, including $8.6
million in sales discounts, incentives and promotions related to cost of goods
sold and $6.5 million in marketing outlays related to selling, general and
administrative expense.
In order to properly communicate to shareholders the terms of this complex
agreement, Gateway consulted with its outside advisors including an
independent valuation firm, and received guidance from the U.S. Securities and
Exchange Commission's Office of the Chief Accountant. The result was a
consensus that the Gateway-Microsoft agreement contains both marketing and
development as well as historical legal components. However, the relative
fair value of each of these components could not be comprehensively
determined, and the benefit is therefore reflected as a reduction of operating
expenses under the line item "Microsoft Benefit" within operating income.
After considering such advice and guidance, Gateway determined to recognize
benefits under the Microsoft agreement upon the later of funding received or
qualified program expenditures.
"Gateway will enjoy the financial benefits of this agreement the next few
years, and we believe it provides us with additional resources to expand our
market, reduce our cost structure, and further drive customer opportunities in
our highly competitive market," Inouye said.
Financial Performance
The company sold 1,009,000 PC units in the second quarter, up 7 percent
sequentially, and up 27 percent year-over-year. The sequential increase in
unit sales is primarily due to market share gains in the company's Retail
business unit, based on initial IDC and NPD data.
In the notebook area, one of the company's key growth objectives, units
grew approximately 20 percent sequentially and 62 percent year-over-year.
Notebook growth resulted in an increase in U.S. portable market share both
sequentially and year-over-year, based on initial IDC and NPD data.
The Retail segment delivered revenue of $490 million, with PC units of
750,000. Sequentially, Retail revenue was up 3 percent and PC units increased
4 percent, despite seasonality, which typically entails somewhat lower unit
sales in the second quarter versus the first quarter. Initial IDC and NPD
data indicate that Gateway continued to gain Retail market share in the second
quarter, reflecting increases in both the desktop and notebook categories.
With July's announcement of a deal to sell PCs through 875 Staples stores in
the U.S., Gateway and eMachines systems are now sold in more than 7,000 retail
locations in the U.S. and Canada.
The Direct sales segment delivered revenue of $111 million, with PC units
of 48,000. Sequentially, Direct sales revenue decreased 26 percent and PC
units decreased 37 percent. The sequential decrease in Direct Sales revenue
and PC units is a result of reduced seasonal demand and market share loss due,
in part, to more limited lower price offerings to minimize conflicts with our
retail partners in the low-end of the PC market.
The Professional segment delivered revenue of $272 million, with PC units
of 211,000. Sequentially, Professional revenue increased 29 percent and PC
units increased 43 percent. The sequential increases generally reflect
positive seasonal buying patterns in the education and government sectors,
although federal government purchasing exhibited softness in the second
quarter as compared to historical second quarter levels. During the quarter,
the Professional segment announced a number of key wins, including the
University of Arizona as well as increased penetration within key existing
accounts such as the United States Navy and Air Force and the Los Angeles
Unified School District.
Gateway also received a significant win from the state of California, as
part of the state's Strategic Sourcing Initiative. The company was awarded a
two-year agreement with three optional one-year extensions to supply our
products to the California state government across three major categories --
desktops, notebooks and displays.
Total non-PC revenue, which includes sales of software and peripherals,
services and accessories in addition to consumer electronics (CE) products,
was up 6 percent sequentially and down 9 percent year-over-year. The
sequential increase is due to an increased focus on services and software and
peripheral sales in the Professional and Direct businesses. The year-over-year
decrease is due to lower CE revenue, largely associated with the Gateway
retail store closure in April and the completion of excess CE inventory sales
primarily in the second and third quarters of 2004. Non-PC sales represented
19 percent of total revenue in the second quarter, which compares with 19
percent in the first quarter and 22 percent a year earlier.
Gross margin contribution from non-PC products and services represented 73
percent of the gross margin dollars in the second quarter, compared to 73
percent in the prior quarter and 75 percent a year earlier.
Gross margin percentage for the second quarter was 10.0 percent, compared
with 9.6 percent in the prior quarter and 1.9 percent in the second quarter of
2004 (which included 7.3 percent of restructuring, transformation and
integration costs).
SG&A expense was $85 million in the second quarter (including $1 million
in restructuring, transformation and integration costs) compared to $88
million (including $8 million in restructuring, transformation and integration
costs) in the prior quarter, and $354 million (including $228 million in
restructuring, transformation and integration costs) a year earlier.
SG&A expense as a percentage of revenue was 9.7 percent compared to 10.5
percent in the prior quarter and 42.2 percent a year earlier. On a non-GAAP
operational basis -- excluding restructuring, transformation and integration
costs -- SG&A as a percent of revenue was 9.6 percent in the second quarter,
compared to 9.6 percent in the first quarter and 15.0 percent a year earlier.
Restructuring, transformation and integration costs
With $1 million of restructuring, transformation and integration costs in
the second quarter, all of the previously announced restructuring,
transformation and integration expenses have now been largely incurred. The
cash outlays associated with these restructuring, transformation and
integration plans were $9 million in the second quarter, leaving approximately
$10 million of remaining restructuring-related cash outlays, net of
anticipated cash generated from the sale of company-owned assets.
Cash and marketable securities
Gateway ended the quarter with $567 million in cash and marketable
securities. The compares with $528 million at the end of the first quarter of
2005, which incorporated a reduction of $55 million related to restricted
cash. Cash and marketable securities increased $39 million during the second
quarter, primarily due to refinancing of $51 million in letters of credit,
guarantees and controlled accounts under the G.E. revolving credit facility
that previously had been secured by cash and restricted cash accounts. At
quarter's end, Gateway also had $50 million of outstanding cash borrowings
under the G.E. credit facility.
Full-year Guidance
Gateway is changing its full-year revenue guidance to $3.9 billion to $4.0
billion, from $4.0 billion to $4.25 billion. With regard to the earnings
outlook, due to unanticipated delays in the resolution of settlements with the
U.S. Internal Revenue Service and a number of state tax authorities, Gateway
is now projecting a $0.02 per share tax expense, reflecting accrued interest.
The company also expects another $0.02 per share impact on EPS as a result of
gross margin pressures in several of its business segments, as well as
increases in component cost pressures. As a result, full-year GAAP earnings
per share guidance is being revised down to 11 to 13 cents from 15 to 17
cents. The company expects full-year EPS before restructuring, transformation
and integration costs to be between 13 and 15 cents, down from its previous
guidance of 17 to 19 cents.
Conference call information
Gateway will host a conference call for analysts on Monday, August 15 at
5:30 pm EDT/2:30 pm PDT, which will be accessible via live audio webcast at
http://www.gateway.com .
About Gateway
Since its founding in 1985, Irvine, Calif.-based Gateway has been a
technology pioneer, offering award-winning PCs and related products to
consumers, businesses, government agencies and schools. After acquiring
eMachines in early 2004, Gateway is now 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.
Certain non-GAAP financial information
This press release contains certain non-GAAP financial information,
including disclosure of the portion of the company's SG&A, gross margins and
results of operations relating to, or affected by, certain restructuring,
transformation and integration expenses. This non-GAAP financial information
is provided as supplementary information and is not an alternative to GAAP.
This non-GAAP financial information is used by management and management
believes it is useful to investors to analyze the company's baseline
performance before charges and expenses that are considered by management to
be outside of Gateway's core operating results, notwithstanding the fact that
such restructuring, transformation and integration expenses may be recurring.
This non-GAAP information is among the primary indicators management uses as a
basis for evaluating Gateway's financial performance as well as for
forecasting of future periods. The presentation of this additional
information is not meant to be considered in isolation or as a substitute for
reported results determined in accordance with GAAP.
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 June 30, Six months ended June 30,
2005 2004 2005 2004
Net sales $873,112 $837,592 $1,710,893 $1,705,975
Cost of goods sold 785,698 821,534 1,543,114 1,581,588
Gross profit 87,414 16,058 167,779 124,387
Selling, general, and
administrative
expenses 84,863 353,549 172,989 649,573
Microsoft benefit 15,069 -- 15,069 --
Operating income
(loss) 17,620 (337,491) 9,859 (525,186)
Other income, net 2,786 1,700 4,600 7,867
Income (loss) before
income taxes 20,406 (335,791) 14,459 (517,319)
Benefit (provision)
for income taxes (3,218) -- (2,457) 12,785
Net income (loss) 17,188 (335,791) 12,002 (504,534)
Preferred stock
dividends and
accretion -- (2,790) -- (5,579)
Net income (loss)
attributable
to common
stockholders $17,188 $(338,581) $12,002 $(510,113)
Net income (loss)
per share:
Basic $0.05 $(0.91) $ 0.03 $(1.44)
Diluted $0.05 (1) $(0.91) $ 0.03 $(1.44)
Weighted average shares
outstanding:
Basic 371,198 372,436 371,174 353,918
Diluted 406,568 372,436 372,190 353,918
(1) Net income (loss) per share excludes $1.3 million of interest expense
related to Gateway's senior convertible notes for purposes of
calculating diluted earnings per share.
Gateway, Inc.
Consolidated Condensed Balance Sheets
(in thousands)
(unaudited)
June 30, December 31,
2005 2004
ASSETS:
Current assets:
Cash and cash equivalents $374,512 $327,793
Marketable securities 192,318 260,537
Accounts receivable, net 324,200 342,121
Inventory 241,389 196,324
Other 322,971 217,663
Total current assets 1,455,390 1,344,438
Property, plant, and equipment, net 64,545 102,657
Intangibles, net 91,541 95,392
Goodwill 155,619 155,619
Other assets 21,772 73,681
$1,788,867 $1,771,787
LIABILITIES AND EQUITY:
Current liabilities:
Notes payable $ 50,000 $ 50,000
Accounts payable 650,170 532,329
Accrued liabilities 195,225 271,912
Accrued royalties 54,219 41,796
Other current liabilities 211,720 226,615
Total current liabilities 1,161,334 1,122,652
Long-term debt 300,000 300,000
Other long-term liabilities 73,300 104,098
Total liabilities 1,534,634 1,526,750
Stockholders' equity 254,233 245,037
$1,788,867 $1,771,787
Gateway, Inc.
Analysis of Consolidated Condensed Statement of Operations
For the three months ended March 31, 2005
(in thousands, except per share amounts)
(unaudited)
Results of
Operations, net
of Restructuring
Charges and
Results of Restructuring Transformation Transformation
Operations Charges (1) Expenses (1) Expenses (1)
Net sales $837,781 $ -- $ -- $837,781
Cost of goods
sold 757,416 -- -- 757,416
Gross profit 80,365 -- -- 80,365
Selling,
general, and
administrative
expenses 88,126 7,586 (2) 494 (3) 80,046
Operating income
(loss) (7,761) (7,586) (494) 319
Other income, net 1,814 -- -- 1,814
Income (loss)
before income
taxes (5,947) (7,586) (494) 2,133
Benefit for income
taxes (760) -- -- (760)
Net income
(loss) $(5,187) $(7,586) $(494) $2,893
Net income (loss)
per share $(0.01) $(0.02) $(0.00) $0.01(4)
(1) This non-GAAP financial information is provided as supplementary
information and is not an alternative to GAAP. The presentation of
this additional information is not meant to be considered in isolation
or as a substitute for results of operations presented in accordance
with GAAP.
(2) Represents costs related to the closure of facilities and accelerated
depreciation, and the severance of employees.
(3) Represents outsourcing transition costs and other expenses related to
the Company's integration following the acquisition of eMachines in
the first quarter of 2004.
(4) Based on diluted weighted average shares outstanding for the period of
408,111.
Gateway, Inc.
Analysis of Consolidated Condensed Statement of Operations
For the three months ended June 30, 2004
(in thousands, except per share amounts)
(unaudited)
Results of
Operations, net
of Restructuring
Charges,
Transformation Transformation
Results of Restructuring and Integration and Integration
Operations Charges (1) Expenses (1) Expenses (1)
Net sales $837,592 $-- $-- $837,592
Cost of goods
sold 821,534 58,320(2) 2,837 (4) 760,377
Gross profit 16,058 (58,320) (2,837) 77,215
Selling,
general, and
administrative
expenses 353,549 202,790 (3) 25,367 (4) 125,392
Operating
loss (337,491) (261,110) (28,204) (48,177)
Other income,
net 1,700 -- -- 1,700
Loss before
income taxes (335,791) (261,110) (28,204) (46,477)
Provision for
income taxes -- -- -- --
Net loss $(335,791) $(261,110) $(28,204) $(46,477)
Preferred stock
dividends and
accretion (2,790) -- -- (2,790)
Net loss
attributable
to common
stockholders $(338,581) $(261,110) $(28,204) $(49,267)
Net loss per
share $(0.91) $(0.70) $(0.08) $(0.13)
(1) This non-GAAP financial information is provided as supplementary
information and is not an alternative to GAAP. The presentation of
this additional information is not meant to be considered in isolation
or as a substitute for results of operations presented in accordance
with GAAP.
(2) Represents the write-down of inventory resulting from the closure of
our stores and a further write-down of an asset classified as held for
sale in a previous restructuring.
(3) Represents costs associated with the lease obligations, net of
recoveries and other costs associated with the retail stores closed
during the quarter, the write-down of capital assets, severance
related costs and contract termination fees.
(4) Represents redundant costs associated with the reintegration of
previously outsourced activities and other expenses related to the
Company's integration following the acquisition of eMachines in the
first quarter.
SOURCE Gateway, Inc.
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Related links:
http://www.gateway.com
CONTACT:
Media, David Hallisey, +1-949-471-7703, or
david.hallisey@gateway.com, or John W. Spelich, +1-949-471-7710,
or john.spelich@gateway.com; or Investors, Marlys Johnson,
+1-605-232-2709, or marlys.johnson@gateway.com, all of Gateway,
Inc.
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