GTW Gateway

* Q2 revenue of $919 million, a 5 percent increase over last year IRVINE, Calif., Aug. 3 /PRNewswire-FirstCall/ -- Gateway, Inc. (NYSE:GTW) today reported results for its second quarter ended June 30, 2006. Revenue amounted to $919 million, compared with $1.078 billion in the first quarter of 2006 and $873 million a year earlier. The company recorded a second quarter net loss of $7.7 million, or 2 cents per diluted share, compared with a net loss of $12.3 million, or 3 cents per diluted share in the prior quarter, and a net profit of $17.2 million, or 5 cents per share a year earlier. "While we are disappointed with our performance in the second quarter, we believe that our efforts in the first half of the year are beginning to resonate with customers and move us in a positive direction," said Rick Snyder, Gateway's chairman and interim chief executive officer. "Our Professional business showed solid improvement and our Direct business is repositioned to regain positive momentum. In addition, we have strong initiatives in marketing, manufacturing and tech support that will launch during the second half of the year. Although we're pleased with Retail revenue growth and progress in Professional and Direct, it is clear that we must continue to improve our overall business performance." Overall Performance The company sold 1,170,500 PC units in the second quarter, down 15 percent sequentially, and up 16 percent year-over-year. The increase in unit sales on a year-over-year basis is primarily due to U.S. market share gains. Based on preliminary IDC data, Gateway was the fastest growing PC company in the U.S. among the top five vendors on a year-over-year basis. Gateway was the third largest PC company in the U.S. with an estimated 6.5 percent market share in the second quarter, up from 6.0 percent a year ago. Gross margin for the second quarter was 5.5 percent, compared with 7.3 percent in the prior quarter and 10.0 percent in the second quarter of 2005. The sequential decrease in gross margin is due to an increase in accrued warranty and royalty expenses associated with a change in management's estimate of reserve requirements in these categories, as well as execution issues in our Retail business. The year-over-year decline in gross margin is due to lower margins in Professional and Retail plus strong growth in the Retail business, which increases the mix of lower margin business. SG&A expense in the second quarter was $66.1 million, or 7.2 percent of revenue, down from $103.1 million in the prior quarter, and down from $84.9 million in the second quarter of 2005. The second quarter sequential decrease in SG&A was due to a $8.4 million reduction in sales tax reserves plus reduced marketing spend and other cost controls established during the second quarter. SG&A expense in the first quarter was high because it included a $14 million litigation settlement charge. Gateway's second quarter results included a $14.2 million reduction in the company's sales tax reserves and liabilities associated with retail customer rebates offset by a $14.6 million increase in its legal settlement expenses plus warranty and royalty reserve increases due to a change in management's estimates for liabilities in these categories. Segment Results The Retail segment delivered revenue of $592 million, down 23 percent sequentially and up 21 percent year-over-year. Retail PC unit sales equaled 949,000, down 18 percent sequentially and up 27 percent year-over-year. Retail segment contribution was $17.2 million, down 58 percent sequentially and down 35 percent year-over-year. The sequential decreases in revenue and unit sales reflect an unusually strong first quarter and seasonal trends. The year-over-year revenue increases reflect market share gains in U.S. Retail and growth in the company's international business. The sequential and year-over-year declines in segment contribution reflect lower gross profits due to execution issues, offset by a $4.8 million net reduction of rebate and royalty reserves. The Professional segment delivered revenue of $250 million, up 24 percent sequentially and down 8 percent year-over-year. Professional PC unit sales equaled 186,000, up 18 percent sequentially and down 12 percent year-over-year. Segment contribution was a loss of $8.3 million in the second quarter, which compares to a loss of $12.2 million in the first quarter and a gain of $18.1 million in the second quarter of last 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 market share erosion. The sequential improvement in segment contribution was due to better margin management, offset by a $10 million increase in warranty and royalty reserves. The year-over-year decrease in segment contribution reflects margin pressures and increases in warranty and royalty reserves. The Direct sales segment delivered revenue of $77 million, down 29 percent sequentially and 31 percent year-over-year. Direct PC unit sales equaled 36,000, down 39 percent sequentially and 26 percent year-over-year. Direct segment contribution was $9.3 million in Q2, down 3 percent from Q1, but up 13 percent from Q2 of last year. The sequential and year-over-year declines in revenue reflect a continuing trend as we redefine our product and marketing strategy to focus on more fully featured solutions. The year-over-year increase in segment contribution was primarily due to reduced selling costs. Total non-PC revenue, which includes sales of stand-alone monitors, software, peripherals, services and accessories, was down 16 percent sequentially and was essentially flat year-over-year, excluding consumer electronics (CE). Non-PC sales, excluding CE, represented 16 percent of total revenue in the second quarter, flat with the first quarter, compared with 18 percent a year earlier. Gross profit from non-PC products and services, excluding CE, was down 20 percent sequentially and down 29 percent from a year earlier. Conference call information Gateway will host a conference call for analysts on Thursday, August 3 at 5:30 pm EDT/2:30 pm PDT, which will be accessible via live audio web cast at http://www.gateway.com/. Revised reporting schedule Gateway will report earnings for the third quarter on Thursday, November 2, 2006. 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 June 30, Six months ended June 30, 2006 2005 2006 2005 Net sales $919,312 $873,112 $1,997,134 $1,710,893 Cost of goods sold 868,736 785,698 1,867,830 1,543,114 Gross profit 50,576 87,414 129,304 167,779 Selling, general, and administrative expenses 66,149 84,863 169,246 172,989 Microsoft benefit 8,625 15,069 17,250 15,069 Operating income (loss) (6,948) 17,620 (22,692) 9,859 Other income (loss), net (1,317) 2,786 920 4,600 Income (loss) before income (8,265) 20,406 (21,772) 14,459 taxes Benefit (Provision) for income taxes 585 (3,218) 1,755 (2,457) Net income (loss) $(7,680) $17,188 $(20,017) $12,002 Net income (loss) per share: Basic $(0.02) $0.05 $(0.05) $0.03 Diluted $(0.02) $0.05 $(0.05) $0.03 Weighted average shares outstanding: Basic 372,089 371,198 372,531 371,174 Diluted 372,089 406,568 372,531 372,190 Gateway, Inc. Consolidated Condensed Balance Sheets (in thousands) (unaudited) June 30, 2006 December 31, 2005 ASSETS: Current assets: Cash and cash equivalents $424,989 $422,488 Marketable securities 99,540 163,200 Accounts receivable, net 319,862 345,288 Inventory 147,808 219,344 Other 345,496 423,752 Total current assets 1,337,695 1,574,072 Property, plant, and equipment, net 85,205 83,156 Intangibles, net 66,540 39,462 Goodwill and non-amortizable intangible assets 205,219 205,219 Other assets 18,688 19,156 $1,713,347 $1,921,065 LIABILITIES AND EQUITY: Current liabilities: Notes payable $50,000 $50,000 Accounts payable 601,272 761,895 Accrued liabilities 248,387 249,111 Accrued royalties 66,889 68,216 Other current liabilities 152,474 175,745 Total current liabilities 1,119,022 1,304,967 Long-term debt 300,000 300,000 Other long-term liabilities 58,564 60,825 Total liabilities 1,477,586 1,665,792 Stockholders' equity 235,761 255,273 $1,713,347 $1,921,065 DATASOURCE: Gateway, Inc. CONTACT: Media, David Hallisey, +1-949-471-7703, , or Investors, Marlys Johnson, +1-605-232-2709, , both of Gateway, Inc. Web site: http://www.gateway.com/

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