GTW Gateway

Gateway Reports Third Quarter Results Company Returns to Non-GAAP Profitability IRVINE, Calif., Oct. 28 /PRNewswire-FirstCall/ -- Gateway, Inc. today reported results for its third quarter ended Sept. 30. (Logo: http://www.newscom.com/cgi-bin/prnh/20020930/LAM050LOGO) On a GAAP basis, the company reported a significantly narrowed net loss of $59 million, or 16 cents per share. This compares with a net loss of $339 million in the second quarter, or 91 cents per share, and a net loss of $139 million a year earlier, or 43 cents per share. Included in the third quarter is $63 million in restructuring, transformation and integration costs, which are part of the previously announced costs in these areas. Restructuring, transformation and integration costs were $289 million in the second quarter and $73 million in the third quarter of 2003. On a non-GAAP basis, before restructuring, transformation and integration costs, the company recorded a net profit of $4 million, Gateway's first operational profit since the fourth quarter of 2001. The non-GAAP profit was 1 cent per diluted share for the quarter, compared with a non-GAAP loss of 13 cents in the second quarter and a 20 cent loss a year earlier. All non-GAAP financial information in this release is reconciled to GAAP in the attached Analysis of Consolidated Condensed Statement of Operations. Revenue amounted to $915 million in the third quarter, compared with $838 million in the second quarter and $883 million a year earlier. "While there's still much work ahead, we're definitely on the right track," said Wayne Inouye, president and chief executive officer. "In the third quarter, executing on the basics led to accelerated cost savings and gross margin improvements across all segments. I am proud of the organization's ability to focus during this period of transition and confident that our continued emphasis on productivity and execution will be the key to Gateway's drive towards sustained profitability." Q3 Progress & Highlights During the third quarter, the company made significant progress in transforming its business model, simplifying processes, increasing productivity and expanding distribution of its products worldwide. Key accomplishments include: * Consolidation of the company's supply base, transitioning PC manufacturing to key original design manufacturers (ODM) partners and closing Gateway-owned manufacturing operations. As indicated at the September analyst meeting, these actions cut desktop PC costs by seven percent; * Consolidation of service and support relationships across the former Gateway and eMachines service provider network, combining best-in-class processes and providers from both companies to further drive business efficiencies and ensure a better overall customer experience; * Introduction of Gateway notebook and desktop PCs into major retailers in North America. Gateway-branded PCs are now available at retailers such as Best Buy, CompUSA, Office Depot and Micro Center in the United States as well as Future Shop and Best Buy in Canada; * Introduction of the industry's first BTX desktop. Gateway optimized Intel's BTX architecture with a unique design that makes its high-performance PCs considerably cooler and quieter than other PCs on the market. * Expansion of international distribution of eMachines PCs in Japan, through retailers Nojima and Joshin Denki Co. Ltd. eMachines PCs are now sold in nearly 200 retail storefronts operated by Ishimaru Denki Co. Ltd., Joshin Denki Co. Ltd., Nojima and Tsukumo Co. Ltd. in Japan. * Rationalization of the company's IT spending and infrastructure resulting in streamlined day-to-day operations and improved productivity; * Consolidation of company headquarters and reduced overall headcount. The company ended the quarter with slightly more than 2,000 employees and as previously announced, will exit 2004 with total headcount below 1,900. Gateway had approximately 7,400 employees at the time the merger with eMachines was announced. Financial Performance The company sold 931,000 PC units in the third quarter, up 17 percent sequentially, and 67 percent year-over-year. The increase in unit sales on a sequential basis is due to continued strong consumer demand, in part due to the successful launch of Gateway-branded PCs at major U.S. retailers. The increase in PC units on a year-over-year basis is largely attributable to the merger with eMachines in March 2004. The Retail segment delivered revenue of $408 million, with PC units of 607,000. Sequentially, Retail revenue increased 33 percent and PC units increased 32 percent. The sequential increase in Retail revenue and PC units is associated with strong product demand across both the U.S. and International markets, including the introduction of Gateway-branded PC products in U.S. third-party retail. The Professional segment delivered revenue of $325 million, with PC units of 240,000. Sequentially, Professional revenue increased 2 percent and PC units decreased 2 percent. The sequential revenue increase is consistent with historical seasonal patterns. The Direct Sales segment delivered revenue of $182 million, with PC units of 84,000. Sequentially, Direct Sales revenue decreased 15 percent and PC units decreased 9 percent. The sequential decrease in Direct Sales revenue and PC units is a result of the elimination of company-owned retail stores in April and lower excess inventory sales. In the third quarter, all business segments delivered significantly improved performance versus the second quarter and prior year. Total CE and non-PC revenue was up 2 percent sequentially and down 23 percent year-over-year. The sequential increase is due to higher stand-alone monitor sales partially offset by lower CE revenue. The year-over-year declines are due to lower CE product sales largely associated with the elimination of company-owned retail stores in April. CE and non-PC sales represented 20 percent of total revenue in the third quarter, which compares with 22 percent in the second quarter and 27 percent a year earlier. Gross margin contribution from CE and non-PC products and services represented 60 percent of the gross margin dollars in the third quarter compared to 76 percent in the prior quarter and 65 percent a year earlier. Gross margin dollar contribution of CE and non-PC products actually increased from the second quarter but was outpaced by margin improvements in the company's PC product lines. Gross margin percentage for the third quarter was 10.1 percent (including 1.1 percentage points impact from restructuring, transformation and integration costs). This compares with 1.9 percent in the prior quarter (including 7.3 percentage points impact from restructuring, transformation and integration costs) and 10.0 percent in the third quarter of 2003 (including 4.4 percentage points impact from restructuring, transformation and integration costs). On an operational basis, gross margin was 11.2 percent in the third quarter compared to 9.2 percent in the second quarter and 14.4 percent a year earlier. SG&A expense was $154 million (including $53 million in restructuring, transformation and integration costs) compared to $354 million (including $228 million for restructuring, transformation and integration costs) in the prior quarter. On an operational basis, excluding restructuring, transformation and integration costs, SG&A was down 20 percent sequentially and nearly 50 percent year-over-year. On a non-GAAP operating basis -- which excludes restructuring, transformation and integration costs -- SG&A as a percent of revenue improved to 11 percent in the third quarter, compared to 15 percent in the second quarter and 22 percent a year earlier. Net loss was $59 million (including $63 million for restructuring, transformation and integration costs), compared with $339 million in the second quarter (including $289 million for restructuring, transformation and integration costs) and $139 million a year earlier (including $73 million for restructuring, transformation and integration costs). Before restructuring, transformation and integration costs, the company recorded a net profit of $4 million, its first operational profit since the fourth quarter of 2001. Restructuring, transformation and integration costs Including the $63 million of restructuring, transformation and integration costs in the third quarter, all but approximately $20 million of the planned restructuring, transformation and integration expenses have now been incurred. The cash outlays associated with these restructuring, transformation and integration plans were $65 million in the third quarter, leaving approximately $85 million of remaining net cash outlays to be incurred over the next several quarters under the previously announced plan. These cash outlays are primarily associated with ongoing lease obligations. Cash and marketable securities Gateway ended the quarter with $660 million in cash and marketable securities. Cash and marketable securities decreased $120 million during the third quarter primarily due to the aforementioned restructuring, transformation and integration cash outlays of $65 million, working capital usage related to a $28 million increase in volume rebate receivables from the company's suppliers and a $17 million increase in receivables from ODM component sales, and capital expenditures of $9 million. Outlook Gateway expects an approximate fourth quarter revenue range of $975 million to $1.025 billion. Sales mix shifts associated with increases in the Retail segment and a seasonal decrease in the Professional segment are expected to reduce overall gross margins by approximately 1 point sequentially. As a result, Gateway expects fourth quarter earnings per share before restructuring, transformation and integration costs of 1 to 2 cents. Fourth quarter restructuring, transformation and integration costs are expected to be approximately 1 cent per share, supporting a total projected GAAP result per share of breakeven to a 1 cent profit. Conference call information Gateway will host a conference call for analysts on Thursday, Oct. 28 at 5:30 pm EDT/2:30 pm PDT, which will be accessible via live audio webcast at http://www.gateway.com/. 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 net income < loss > relating to, or affected by, certain restructuring charges, transformation expenses 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. About Gateway Since its founding in 1985, Gateway (NYSE:GTW) has been a technology pioneer, offering award-winning PCs and related products to consumers, businesses, government offices and schools. With its acquisition of eMachines now complete, Gateway is the third-largest PC company in the U.S. and among the top ten worldwide. Its products under both brands received more than 150 awards and honors last year. Gateway products are offered at major retailers, over the web and phone, and through its direct and indirect sales force. eMachines products are sold by major retailers. 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; 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, 2004 2003 2004 2003 Net sales $915,132 $883,140 $2,621,107 $2,527,230 Cost of goods sold 823,038 794,938 2,404,626 2,195,136 Gross profit 92,094 88,202 216,481 332,094 Selling, general, and administrative expenses 153,768 229,504 803,341 750,117 Operating loss (61,674) (141,302) (586,860) (418,023) Other income, net 3,424 5,246 11,291 14,485 Loss before income taxes (58,250) (136,056) (575,569) (403,538) Benefit for income taxes 1,774 -- 14,559 -- Net loss $(56,476) $(136,056) $(561,010) $(403,538) Preferred stock dividends and accretion (2,792) (2,785) (8,371) (8,351) Net loss attributable to common stockholders $(59,268) $(138,841) $(569,381) $(411,889) Basic and diluted net loss per share $(0.16) $(0.43) $(1.58) $(1.27) Basic and diluted weighted average shares outstanding 372,940 324,116 360,305 324,087 Gateway, Inc. Consolidated Condensed Balance Sheets (in thousands) (unaudited) September 30, December 31, 2004 2003 ASSETS: Current assets: Cash and cash equivalents $318,200 $349,101 Marketable securities 341,360 739,936 Accounts receivable, net 282,518 210,151 Inventory 224,975 114,136 Other 278,330 250,153 Total current assets 1,445,383 1,663,477 Property, plant, and equipment, net 113,498 330,913 Intangibles, net 102,259 13,983 Goodwill 155,626 -- Other assets 9,109 20,065 $1,825,875 $2,028,438 LIABILITIES AND EQUITY: Current liabilities: Accounts payable $561,196 $415,971 Accrued liabilities 301,377 277,455 Accrued royalties 48,877 48,488 Other current liabilities 239,225 257,090 Total current liabilities 1,150,675 999,004 Other long-term liabilities 120,583 109,696 Total liabilities 1,271,258 1,108,700 Series C preferred stock 199,460 197,720 Stockholders' equity 355,157 722,018 $1,825,875 $2,028,438 Gateway, Inc. Analysis of Consolidated Condensed Statement of Operations For the three months ended September 30, 2004 (in thousands, except per share amounts) (unaudited) Results of Operations, net of Restructuring Charges, Transformation Transformation and Results of Restructuring and Integration Integration Operations Charges (1) Expenses (1) Expenses (1) Net sales $915,132 $-- $-- $915,132 Cost of goods sold 823,038 9,112 (2) 1,067 (4) 812,859 Gross profit 92,094 (9,112) (1,067) 102,273 Selling, general, and administrative expenses 153,768 41,904 (3) 10,978 (4) 100,886 Operating income (loss) (61,674) (51,016) (12,045) 1,387 Other income, net 3,424 -- -- 3,424 Income (loss) before income taxes (58,250) (51,016) (12,045) 4,811 Benefit for income taxes 1,774 -- -- 1,774 Net income (loss) $(56,476) $(51,016) $(12,045) $6,585 Preferred stock dividends and accretion (2,792) -- -- (2,792) Net income (loss) attributable to common stockholders $(59,268) $(51,016) $(12,045) $3,793 Net income (loss) per share $(0.16) $(0.14) $(0.03) $ 0.01 (5) (1) This non-GAAP financial information is provided as supplementary information and is not an alternative to GAAP. The presentation of this additional information is not meant to be considered in isolation or as a substitute for results of operations presented in accordance with GAAP. (2) Represents costs related to the severance of employees and the closure of facilities. (3) Represents costs related to the closure of facilities and accelerated depreciation, the severance of employees and contract termination fees. (4) Represents outsourcing transition costs and other expenses related to the Company's integration following the acquisition of eMachines in the first quarter. (5) Calculated based on diluted weighted average shares outstanding for the quarter ended September 30, 2004. Gateway, Inc. Analysis of Consolidated Condensed Statement of Operations For the three months ended June 30, 2004 (in thousands, except per share amounts) (unaudited) Results of Operations, net of Restructuring Charges, Transformation Transformation Results of Restructuring and Integration and Integration Operations Charges (1) Expenses (1) Expenses (1) Net sales $837,592 $-- $-- $837,592 Cost of goods sold 821,534 58,320 (2) 2,837 (4) 760,377 Gross profit 16,058 (58,320) (2,837) 77,215 Selling, general, and administrative expenses 353,549 202,790 (3) 25,367 (4) 125,392 Operating loss (337,491) (261,110) (28,204) (48,177) Other income, net 1,700 -- -- 1,700 Loss before income taxes (335,791) (261,110) (28,204) (46,477) Provision for income taxes -- -- -- -- Net loss $(335,791) $(261,110) $(28,204) $(46,477) Preferred stock dividends and accretion (2,790) -- -- (2,790) Net loss attributable to common stockholders $(338,581) $(261,110) $(28,204) $(49,267) Net loss per share $(0.91) $(0.70) $(0.08) $(0.13) (1) This non-GAAP financial information is provided as supplementary information and is not an alternative to GAAP. The presentation of this additional information is not meant to be considered in isolation or as a substitute for results of operations presented in accordance with GAAP. (2) Represents the write-down of inventory resulting from the closure of our stores and a further write-down of an asset classified as held for sale in a previous restructuring. (3) Represents costs associated with the lease obligations, net of recoveries and other costs associated with the retail stores closed during the quarter, the write-down of capital assets, severance related costs and contract termination fees. (4) Represents outsourcing transition costs and other expenses related to the Company's integration following the acquisition of eMachines in the first quarter. Gateway, Inc. Analysis of Consolidated Condensed Statement of Operations For the three months ended September 30, 2003 (in thousands, except per share amounts) (unaudited) Results of Operations, net of Restructuring Charges and Results of Restructuring Transformation Transformation Operations Charges (1) Expenses (1) Expenses (1) Net sales $883,140 $-- $-- $883,140 Cost of goods sold 794,938 37,122 (2) 2,094 (4) 755,722 Gross profit 88,202 (37,122) (2,094) 127,418 Selling, general, and administrative expenses 229,504 16,440 (3) 17,121 (4) 195,943 Operating loss (141,302) (53,562) (19,215) (68,525) Other income, net 5,246 -- -- 5,246 Loss before income taxes (136,056) (53,562) (19,215) (63,279) Benefit for income taxes -- -- -- -- Net loss $(136,056) $(53,562) $(19,215) $(63,279) Preferred stock dividends and accretion (2,785) -- -- (2,785) Net loss attributable to common stockholders $(138,841) $(53,562) $(19,215) $(66,064) Net loss per share $(0.43) $(0.17) $(0.06) $(0.20) (1) This non-GAAP financial information is provided as supplementary information and is not an alternative to GAAP. The presentation of this additional information is not meant to be considered in isolation or as a substitute for results of operations presented in accordance with GAAP. (2) Represents approximately $16 million related to the closure of facilities, approximately $11 million related to the severance of employees and approximately $10 million related to asset write-downs. (3) Represents approximately $14 million related to asset write-downs and accelerated depreciation and approximately $2 million related to the severance of employees. (4) Represents store remodeling, consulting and other expenses related to the Company's transformation into a branded integrator. http://www.newscom.com/cgi-bin/prnh/20020930/LAM050LOGO http://photoarchive.ap.org/ 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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