GTW Gateway

* Q3 Revenue of $1.019 Billion 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 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 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 DATASOURCE: Gateway, Inc. CONTACT: Media, David Hallisey, +1-949-471-7703, , or John W. Spelich, +1-949-471-7710, , or Investors, Marlys Johnson, +1-605-232-2709, , all of Gateway, Inc. Web site: http://www.gateway.com/

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