GTW Gateway

- Q4 Revenue of $1.124 Billion IRVINE, Calif., Feb. 2 /PRNewswire-FirstCall/ -- Gateway, Inc. (NYSE:GTW) today reported results for its fourth quarter ended Dec. 31, 2005. The company recorded fourth quarter net income of $22.4 million, or 6 cents per diluted share (including higher other income and a $9.8 million reversal of tax accruals and related interest for current and prior years, or 2 cents per share), compared with net income of $15.1 million, or 4 cents per diluted share in the prior quarter, and net income available to common shareholders of $93.9 million (including a one-time $100 million gain from the retirement of the Series A and Series C preferred stock previously held by AOL), or a diluted earnings per share loss of 2 cents a year earlier, after deducting the gain associated with the retirement of the Series A and C preferred stock. "While our fourth quarter results were mixed, our Retail business continued to post very strong results," said Wayne Inouye, Gateway president and chief executive officer. "Our Professional business continues to face a very competitive market, but we continue to invest in developing the infrastructure, products and services to compete in this business over the long term. Our Direct results were disappointing, but we are re-aligning our marketing and advertising to achieve better results. We remain committed to posting profitable, sustainable growth over the long term with a keen focus on keeping our costs among the lowest in the industry." In the fourth quarter, Gateway's operating income included $13.8 million of benefits related to the April 2005 agreement with Microsoft Corp., compared with $11.6 million in the third quarter. Recognition of amounts paid to Gateway by Microsoft are based on Gateway incurring qualified spend on marketing and promotion activities. Also included in the fourth quarter operating results are a number of one-time items that netted to an approximate $4.6 million charge, predominantly from an increase in a legal reserve, the revaluation of certain properties held for resale and the write-off of certain sales and franchise tax accruals offset by a favorable contractual settlement. Financial Performance The company sold 1,359,000 PC units in the fourth quarter, up 16 percent sequentially, and up 13 percent year-over-year. The increase in unit sales on a sequential and year-over-year basis is primarily due to seasonal trends and market share gains in Retail. Based on the most recent IDC data, sequentially Gateway was the fastest growing PC company in the U.S. among the top five vendors, and the second fastest on a year-over-year basis. The Retail segment, which includes the company's international sales, delivered revenue of $792 million, with PC units of 1,134,000. Retail revenue was up 32 percent sequentially and 31 percent year-over-year. Retail PC units increased 30 percent sequentially and 23 percent year-over-year. The sequential and year-over-year revenue increases were due to market share gains in U.S. Retail as well as growth in the company's International business. Gateway and eMachines products 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 $115 million, with PC units of 58,000. Direct revenue decreased 13 percent sequentially and 39 percent year-over-year. PC units decreased 18 percent sequentially and 43 percent year-over-year. The sequential and year-over-year decline in revenue reflect marketing expenditures that failed to drive sales. The decline in revenue on a year-over-year-basis is also due to discontinuing the sale of Gateway branded consumer electronics in Q1 2005. The Professional segment delivered revenue of $217 million, with PC units of 167,000. Professional revenue decreased 24 percent sequentially and 9 percent year-over-year. Professional PC units were down 26 percent sequentially and 3 percent year-over-year. The sequential decreases in revenue were predominantly due to seasonal trends. The year-over-year decline in revenue is due to lower unit sales and declining average unit prices. Total non-PC revenue, which includes sales of stand-alone monitors, software, peripherals, services and accessories, was up 25 percent sequentially and 25 percent year-over-year, excluding consumer electronics (CE). The sequential and year-over-year increases reflect strong sales of stand-alone monitors, particularly those sold through Retail. Non-PC sales, excluding CE, represented 19 percent of total revenue in the fourth quarter, which compares with 16 percent in the third quarter and 16 percent a year earlier. Gross margin contribution from non-PC products and services, excluding CE, was up 3 percent sequentially and up 8 percent from a year earlier. Gross margin percentage for the fourth quarter was 7.7 percent, compared with 8.3 percent in the prior quarter and 8.8 percent in the fourth quarter of 2004. In the fourth quarter, Retail gross margin percentage benefited from a $5.5 million contractual settlement, but was still up both sequentially and year-over-year on an adjusted basis. The sequential and year-over-year declines in gross margin percentage are due to lower margins in Professional and strong growth in the Retail business, which typically has lower margins. This was partially offset by achieving higher margins in Retail and Direct relative to historical results. SG&A expense in the fourth quarter was $88.2 million, or 7.8 percent of revenue up from $77.6 million, or 7.6 percent of revenue in the prior quarter, but down from $106 million or 10.3 percent of revenue in the fourth quarter of 2004. The fourth quarter increase was due to approximately $9.8 million of one-time costs, including restructuring costs and adjustments to legal reserves and sales/franchise tax accounts. Cash and marketable securities Gateway ended the quarter with $586 million in cash and marketable securities, a decrease of $49.6 million from the third quarter of 2005. The key driver for this cash decrease was a $26.8 million increase in inventory in and a $24.1 million increase in accounts receivable both due to significant Retail revenue growth. Full year 2005 Gateway reported full-year 2005 revenue of $3.854 billion and a net profit of $49.5 million, or 13 cents per diluted share. Total PC unit sales for the year were 4.5 million, a 27 percent increase over the prior year. SG&A expenses for the year were $339 million (including $13.2 million in restructuring, transformation and integration expenses), compared with $909 million in 2004 (including $392 million in restructuring, transformation and integration expenses). Conference call information Gateway will host a conference call for analysts on Thursday, February 2 at 5:30 pm EST/2:30 pm PST, 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. 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 Year ended December 31, December 31, 2005 2004 2005 2004 Net sales $1,124,194 $1,028,627 $3,854,061 $3,649,734 Cost of goods sold 1,037,506 938,036 3,514,901 3,342,662 Gross profit 86,688 90,591 339,160 307,072 Selling, general, and administrative expenses 88,231 105,709 338,777 909,050 Microsoft benefit 13,802 -- 40,500 -- Operating income (loss) 12,259 (15,118) 40,883 (601,978) Other income, net 1,868 8,956 6,791 20,247 Income (loss) before income taxes 14,127 (6,162) 47,674 (581,731) Benefit (Provision) for income taxes 8,281 (437) 1,797 14,113 Net income (loss) 22,408 (6,599) 49,471 (567,618) Gain on redemption of preferred stock, net of dividends -- 100,513 -- 92,142 Net income (loss) attributable to common stockholders $22,408 $93,914 $49,471 $(475,476) Net income (loss) per share: Basic $0.06 $0.25 $0.13 $(1.31) Diluted $0.06 $(0.02) $0.13 $(1.45) Weighted average shares outstanding: Basic 373,115 373,844 371,661 363,708 Diluted 409,250 398,958 372,167 391,115 Gateway, Inc. Consolidated Condensed Balance Sheets (in thousands) (unaudited) December 31, 2005 December 31, 2004 ASSETS: Current assets: Cash and cash equivalents $422,488 $327,793 Marketable securities 163,200 260,537 Accounts receivable, net 345,288 342,121 Inventory 219,344 196,324 Other 423,753 217,663 Total current assets 1,574,073 1,344,438 Property, plant, and equipment, net 83,156 102,657 Intangibles, net 39,462 45,792 Goodwill and non-amortizable intangible assets 205,219 205,219 Other assets 19,156 73,681 $1,921,066 $1,771,787 LIABILITIES AND EQUITY: Current liabilities: Notes payable $50,000 $50,000 Accounts payable 761,895 532,329 Accrued liabilities 224,311 271,912 Accrued royalties 55,089 41,796 Other current liabilities 173,958 226,615 Total current liabilities 1,265,253 1,122,652 Long-term debt 300,000 300,000 Other long-term liabilities 57,230 104,098 Total liabilities 1,622,483 1,526,750 Stockholders' equity 298,583 245,037 $1,921,066 $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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