Gateway Reports Third Quarter 2005 Results
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Gateway Reports Third Quarter 2005 Results
* Q3 Revenue of $1.019 Billion
* Q3 Net Income of $15.1 million, or $0.04 per Share
* Second Straight Quarter of GAAP Net Income
IRVINE, Calif., Oct. 27 /PRNewswire-FirstCall/ -- Gateway, Inc.
(NYSE: GTW) today reported results for its third quarter ended Sept. 30, 2005.
The company recorded third quarter net income of $15.1 million, or 4 cents
per share, compared with net income of $17.2 million, or 5 cents per share in
the prior quarter, and a net loss of $59 million (including $63 million in
restructuring, transformation and integration costs ("restructuring costs")),
or 16 cents loss per share a year earlier.
Included in the third quarter results are a number of one-time items that
netted to an approximate $1 million benefit to the company, which included an
anticipated favorable outcome of a commercial dispute, a facility impairment
charge, an international restructuring reserve increase and a gain on a
facility sale.
Revenue amounted to $1.019 billion, compared with $873 million in the
second quarter and $915 million a year earlier.
"Our third quarter results, especially a double-digit percentage increase
in revenue both sequentially and year-over-year, show that Gateway continues
to head in the right direction," said Wayne Inouye, Gateway president and
chief executive officer. "Our retail business continues to be strong, we're
encouraged by sequential revenue and market share gains in Direct, and our
Professional business continues to sign important contracts, which should grow
future revenues."
In the third quarter, Gateway's operating income included $11.6 million of
benefits related to the April 2005 agreement with Microsoft Corp., compared
with $15.1 million in the second quarter. Recognition of amounts paid to
Gateway by Microsoft are based on Gateway incurring qualified spend in
marketing and promotion activities.
Financial Performance
The company sold 1,166,800 PC units in the third quarter, up 16 percent
sequentially, and up 25 percent year-over-year. The increase in unit sales on
a sequential basis is primarily due to seasonal trends and market share gains
in Direct. The increase in PC units on a year-over-year basis is attributable
to market share gains in U.S. Retail.
The Retail segment, which includes the company's international sales,
delivered revenue of $601 million, with PC units of 871,400. Sequentially,
Retail revenue was up 23 percent and PC units increased 16 percent. Gateway
and eMachines systems are now sold in more than 7,000 retail locations in the
U.S. and Canada and in more than 2,000 retail locations internationally,
including Japan, Mexico and the UK.
The Direct sales segment delivered revenue of $132 million, with PC units
of 70,900. Sequentially, PC units increased 48 percent and sales revenue was
up 19 percent. In the third quarter, Gateway's unit growth outperformed the
industry by more than three to one.
The Professional segment delivered revenue of $286 million, with PC units
of 224,400. Sequentially, Professional revenue increased 5 percent and PC
units were up 6 percent. The sequential revenue increase reflects the
seasonal strength in educational and state and local government markets
partially offset by weaker-than-expected federal revenue.
Total non-PC revenue, which includes sales of software and peripherals,
services and accessories, was sequentially flat and down 8 percent
year-over-year. The year-over-year decrease is due to a significant drop in
CE revenue. Sequentially, non-PC revenue, excluding CE, was up 10.2 percent
and up 5.5 percent year-over-year. Non-PC sales, excluding CE, represented
16 percent of total revenue in the third quarter, which compares with
17 percent in the second quarter. This decline is driven primarily by strong
growth in Retail, which has lower non-PC revenue. Gross margin contribution
from non-PC products and services, excluding CE, was sequentially flat and up
5 percent from a year earlier.
Gross margin percentage for the third quarter was 8.3 percent, compared
with 10 percent in the prior quarter and 10.1 percent in the third quarter of
2004. The sequential and year-over-year declines are primarily due to strong
growth in Retail, which has lower margins, and continued competitive pressures
in Professional, and, to a lesser extent, Retail.
SG&A expense was $78 million in the third quarter compared to $85 million
in the prior quarter, and $154 million (including $53 million in restructuring
costs) a year earlier. SG&A expense as a percentage of revenue was
7.6 percent compared to 9.7 percent in the prior quarter and 16.8 percent a
year earlier.
Cash and marketable securities
Gateway ended the quarter with $635 million in cash and marketable
securities, an increase of $68 million from the second quarter of 2005. The
key driver for this cash increase was a positive contribution of more than
$63 million from cash flow from operations, driven by inventory reductions of
almost $49 million and increasing accounts payable by $84 million, offset by
growth in other current assets of $97 million.
Guidance
The company remains comfortable with its previously stated revenue and
earnings guidance for 2005 of revenues in the range of $3.9 - $4 billion and
full-year GAAP earnings per share to be 11 to 13 cents.
For 2006, Gateway has adopted a policy of foregoing specific annual
revenue and earnings guidance, as the company believes that the downside of
providing such guidance significantly outweighs any benefit to shareholders in
the present regulatory environment. Gateway will consider publishing
financial milestones to allow shareholders to track our progress.
Conference call information
Gateway will host a conference call for analysts on Thursday, October 27
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 (NYSE: GTW) 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 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 Nine months ended
September 30, September 30,
2005 2004 2005 2004
Net sales $1,018,973 $915,132 $2,729,866 $2,621,107
Cost of goods sold 934,280 823,038 2,477,394 2,404,626
Gross profit 84,693 92,094 252,472 216,481
Selling, general, and
administrative expenses 77,557 153,768 250,546 803,341
Microsoft benefit 11,629 -- 26,698 --
Operating income (loss) 18,765 (61,674) 28,624 (586,860)
Other income, net 323 3,424 4,923 11,291
Income (loss) before income
taxes 19,088 (58,250) 33,547 (575,569)
(Provision) benefit for
income taxes (4,027) 1,774 (6,484) 14,559
Net income (loss) 15,061 (56,476) 27,063 (561,010)
Preferred stock dividends
and accretion -- (2,792) -- (8,371)
Net income (loss)
attributable to common
stockholders $15,061 $(59,268) $27,063 $(569,381)
Net income (loss) per share:
Basic $0.04 $(0.16) $0.07 $(1.58)
Diluted $0.04(1) $(0.16) $0.07 $(1.58)
Weighted average shares
outstanding:
Basic 371,166 372,940 371,171 360,305
Diluted 406,354 372,940 372,002 360,305
(1) Net income (loss) per share excludes $1 million on 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)
September 30, 2005 December 31, 2004
ASSETS:
Current assets:
Cash and cash equivalents $465,125 $327,793
Marketable securities 170,145 260,537
Accounts receivable, net 321,146 342,121
Inventory 192,575 196,324
Other 420,214 217,663
Total current assets 1,569,205 1,344,438
Property, plant, and equipment, net 66,424 102,657
Intangibles, net 90,302 95,392
Goodwill 155,619 155,619
Other assets 21,243 73,681
$1,902,793 $1,771,787
LIABILITIES AND EQUITY:
Current liabilities:
Notes payable $50,000 $50,000
Accounts payable 734,141 532,329
Accrued liabilities 205,091 271,912
Accrued royalties 81,848 41,796
Other current liabilities 197,355 226,615
Total current liabilities 1,268,435 1,122,652
Long-term debt 300,000 300,000
Other long-term liabilities 61,955 104,098
Total liabilities 1,630,390 1,526,750
Stockholders' equity 272,403 245,037
$1,902,793 $1,771,787
SOURCE Gateway, Inc.
Web site: http: //www.gateway.com
CONTACT: Media, David Hallisey, +1-949-471-7703, david.hallisey@gateway.com, or John W. Spelich, +1-949-471-7710, john.spelich@gateway.com, or Investors, Marlys Johnson, +1-605-232-2709, marlys.johnson@gateway.com, all of Gateway, Inc.
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Gateway, Inc.
