* Revenue of $963 Million
* Operating Income of $7.9 Million
* Net Income of $18.2 Million, or $0.05 per Diluted Share
IRVINE, Calif., Nov. 2 /PRNewswire-FirstCall/ -- Gateway, Inc. (NYSE:
GTW) today reported results for its third quarter ended September 30, 2006.
Revenue amounted to $963 million, up from $919 million in the second
quarter of 2006 and compared to $1.019 billion a year earlier.
Operating income equaled $7.9 million, up from a loss of $6.9 million
in the second quarter and compared to $18.8 million a year earlier.
The company recorded a third quarter net income of $18.2 million, or 5
cents per diluted share, after a net tax benefit of $8.2 million. This
compares with a net loss of $7.7 million, or 2 cents per diluted share in
the prior quarter, and net income of $15.1 million, or 4 cents per diluted
share a year earlier.
"Gateway showed marked improvement in its operating results compared to
recent quarters. I am particularly pleased by the improvements in our
Professional business," said Ed Coleman, Gateway's chief executive officer.
"In addition, our retail business continued to generate growth in units and
revenue, despite an increasingly competitive environment. While encouraged
with these results, we have much work ahead of us to improve our execution
and efficiency, leverage the Gateway brand and position the Company so that
Gateway lives up to its full potential."
Overall Performance
The company sold 1,174,600 PC units in the third quarter, essentially
flat both sequentially and year-over-year. Based on preliminary IDC data,
Gateway was the third largest PC company in the U.S. with an estimated 6
percent market share in the third quarter, unchanged from a year ago.
Gross margin for the third quarter was 7.6 percent, compared with 5.5
percent in the prior quarter and 8.3 percent in the third quarter of 2005.
The sequential increase is due to significant gross margin improvements in
Professional, offset by gross margin declines in the Direct segment. Q2
gross margin was impacted by a $12 million increase in warranty and royalty
reserves. The year-over-year decline in gross margin is due to continued
growth of the Retail segment, which increased the mix of lower margin
business, as well as gross margin declines in the Direct segment.
SG&A expense in the third quarter was $74.1 million, or 7.7 percent of
revenue, up from $66.1 million in the prior quarter, and down from $77.6
million in the third quarter of 2005. The third quarter sequential increase
in SG&A was due to increased marketing expenditures in Q3 and an $8.4
million reduction in sales tax reserves due to the settlement of a sales,
income and franchise tax dispute reflected in Q2 results.
As part of Gateway's 2005 Marketing, Development and Settlement
Agreement with Microsoft, third quarter results included the continuing
quarterly benefit of $8.6 million, down $3 million from the same period
last year.
Segment Results
The Retail segment delivered revenue of $626 million, up 6 percent
sequentially and up 4 percent year-over-year. Retail PC unit sales equaled
946,000, flat sequentially and up 9 percent year-over-year. The year-over-
year increase in units and revenue reflects growth in the company's
international business, and the continued success of Gateway-branded PCs in
the retail channel.
Retail gross margin was $26.5 million or 4.2 percent of revenue, up
from $21.9 million or 3.7 percent of revenue in the prior quarter and down
from $29.1 million or 4.8 percent of revenue in the third quarter of 2005.
Retail segment contribution was $20.9 million (after Retail SG&A expenses
of $5.6 million), up from $17.2 million sequentially (after SG&A expenses
of $4.6 million) and down from $26.6 million a year ago (after SG&A
expenses of $2.5 million). The sequential improvement in gross margin and
segment contribution is primarily due to the shift in product mix from
desktops to notebooks and operational improvements. The year-over-year
decline in segment contribution reflects continued competitive pricing
pressures.
The Professional segment delivered revenue of $263 million, up 5
percent sequentially and down 8 percent year-over-year. Professional PC
unit sales equaled 194,000, up 4 percent sequentially and down 14 percent
year-over-year. The sequential increases in revenue and unit sales reflect
seasonal trends. The year-over-year decreases in revenue and unit sales
were predominantly due to greater selectivity in contract bidding.
Professional gross margin was $34.3 million or 13.1 percent of revenue,
up from $11.1 million or 4.4 percent of revenue in the prior quarter and up
from $28.3 million or 9.9 percent of revenue in the third quarter of 2005.
Professional segment contribution was $18.2 million (after Professional
SG&A expenses of $16.2 million), up from a loss of $8.3 million in the
prior quarter (after SG&A expenses of $19.3 million) and up from $7.8
million a year ago (after SG&A expenses of $20.4 million). The sequential
and year-over-year improvement in gross margin and segment contribution was
due to operational improvements and better margin management. Professional
gross margin and segment contribution in Q2 had been impacted by one-time
increases in warranty and royalty reserves of $10 million. Professional
segment contribution also benefited from lower Professional expenses for
headcount, travel and marketing.
The Direct segment delivered revenue of $75 million, down 3 percent
sequentially and 44 percent year-over-year. Direct PC unit sales equaled
35,000, down 2 percent sequentially and 51 percent year-over-year. The
sequential and year-over-year declines in units and revenue reflect the
impact of the change in product and marketing strategy to focus on more
fully-featured solutions and reduce Retail channel conflict.
Direct gross margin was $12.5 million or 16.8 percent of revenue, down
from $17.6 million or 22.9 percent of revenue in the prior quarter and down
from $27.3 million or 20.6 percent of revenue in the third quarter of 2005.
Direct segment contribution was $0.4 million (after Direct SG&A expenses of
$12.2 million), down from $9.3 million in the second quarter (after SG&A
expenses of $8.4 million) and down from $14.7 million a year ago (after
SG&A expenses of $12.6 million). The sequential and year-over-year declines
in gross margin and segment contribution reflect the impact of lower Direct
sales volume, the change in pricing strategy of one of Gateway's alliance
partners which reduced Gateway's revenue share, reduced amortization of
extended warranty revenue, and an increase in marketing expenses.
Non-PC Performance
Sales of non-PC products, which includes stand-alone monitors,
software, peripherals, services and accessories, represented 16 percent of
total revenue in the third quarter, flat with the second quarter and down
from 17 percent a year earlier. Total non-PC revenue was up 4 percent
sequentially and was down 8 percent year-over-year. The sequential and year
over year decline is primarily due to the decreasing unit sales in Direct,
which generally yields a higher percentage of non-PC sales than other
segments.
Working Capital
Gateway improved its management of working capital this quarter.
Working capital at the end of the quarter was $232 million, up from $219
million at the end of the second quarter and down from $269 million at the
end of 2005. Net accounts receivable closed at $287 million (27 days sales
outstanding) down from $320 million (32 days) at the end of the prior
quarter and down from $345 million (28 days) at the end of 2005. Net
inventory closed at $122 million (13 days inventory on hand) down from $148
million (16 days) at the end of the prior quarter and from $219 million (19
days) at the end of 2005. Gateway's inventory turns increased to 29 times
during the quarter up from 24 times in the second quarter and up from 19
times at the end of 2005. Accounts payable closed at $516 million (53 days
payable outstanding) down from $601 million (63 days) at the end of the
prior quarter and down from $762 million (67 days) at the end of 2005. The
reduction in days payable outstanding is in line with Gateway's strategy to
strengthen its relationships with its vendors and manufacturing partners.
At the end of the third quarter, Gateway had approximately $95 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 and increase its
reported working capital.
Cash and marketable securities decreased to $429 million from $524
million at the end of the second quarter and from $586 million at the end
of 2005. The decrease during the first nine months of 2006 reflects the
reduction in days payable outstanding and a $25 million reduction in notes
payable. The decrease during the first nine months of 2006 reflects the
reduction in days payable outstanding and a $25 million reduction in notes
payable partially offset by changes in other working capital accounts.
Conference Call Information
Gateway will host a conference call for analysts on Thursday, November
2 at 5:30 pm EST/2:30 pm PST, 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 Nine months ended
September 30, September 30,
2006 2005 2006 2005
Net sales $963,162 $1,018,973 $2,960,296 $2,729,866
Cost of goods sold 889,792 934,280 2,757,622 2,477,394
Gross margin 73,370 84,693 202,674 252,472
Selling, general, and
administrative
expenses 74,066 77,557 243,312 250,546
Microsoft benefit 8,625 11,629 25,875 26,698
Operating income
(loss) 7,929 18,765 (14,763) 28,624
Other income (loss),
net 2,086 323 3,007 4,923
Income (loss) before
income taxes 10,015 19,088 (11,756) 33,547
Benefit (Provision)
for income taxes 8,155 (4,027) 9,910 (6,484)
Net income (loss) $18,170 $15,061 $(1,846) $27,063
Net income (loss) per
share:
Basic $0.05 $0.04 $(0.00) $0.07
Diluted $0.05 $0.04 $(0.00) $0.07
Weighted average shares
outstanding:
Basic 371,846 371,166 373,669 371,171
Diluted 407,612 406,354 373,669 372,002
Gateway, Inc.
Consolidated Condensed Balance Sheets
(in thousands)
(unaudited)
September 30, December 31,
2006 2005
ASSETS:
Current assets:
Cash and cash equivalents $348,351 $422,488
Marketable securities 80,862 163,200
Accounts receivable, net 287,439 345,288
Inventory 121,900 219,344
Other 412,315 423,752
Total current assets 1,250,867 1,574,072
Property, plant, and equipment, net 94,266 83,156
Intangibles, net 64,220 39,462
Goodwill and non-amortizable intangible assets 205,219 205,219
Other assets 27,623 19,156
$1,642,195 $1,921,065
LIABILITIES AND EQUITY:
Current liabilities:
Notes payable $25,000 $50,000
Accounts payable 515,659 761,895
Accrued liabilities 255,830 249,111
Accrued royalties 77,456 68,216
Other current liabilities 144,640 175,745
Total current liabilities 1,018,585 1,304,967
Long-term debt 300,000 300,000
Other long-term liabilities 67,649 60,825
Total liabilities 1,386,234 1,665,792
Stockholders' equity 255,961 255,273
$1,642,195 $1,921,065
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.; or Joele Frank or Barrett Golden, both of Joele Frank,
Wilkinson Brimmer Katcher, +1-212-355-4449, for Gateway, Inc.
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