Gateway sees "momentum" in consumer business

Net income was $122 million. The company had 32 percent revenue growth in its core consumer PC sales area, helped by ready supplies of motherboards, memory and midrange chips. Business sales declined 10 percent, however, despite an effort to increase sales in the segment.

Analysts surveyed by First Call/Thomson Financial had expected earnings of 36 cents per share on revenue estimated at $2.13 billion to $2.15 billion.

For the same quarter a year ago, Gateway reported earnings of 28 cents a share on revenue of $1.9 billion. In the first quarter of this year, Gateway earned 41 cents per share on revenue of $2.34 billion.

Business sales dropped 10 percent compared with a year ago. That's less than the 19 percent drop seen in the first quarter but below the single-digit drop some analysts had predicted. Gateway projected the business unit would see sales gains by the fourth quarter.

"We have a lot of focus on fixing that business," chief financial officer John Todd told CNET News.com.

Todd said the company is comfortable with Wall Street's earnings estimates for both the third quarter and the full year.

"We have a lot of momentum coming from our consumer business," Todd said.

Todd said Gateway had already reached its goal of 40 percent of income coming from "beyond the box" sources such as Internet service provider accounts, printers and training.

"We're two quarters ahead of where we wanted to be," Todd said.

The company's earnings provide the first glimpse of whether PC makers' quarterly earnings reports will be as bullish as some expect.

"It was a strong quarter," said Bear Stearns analyst Andrew Neff.

Lehman Brothers analyst Dan Niles said the results bode well for the industry.

"After a pretty rocky start to the quarter for most PC makers, business started to get better (in the latter part of the quarter)," Niles said in an interview. "We think this is going to be the best year for revenue and profit growth for the PC industry since 1996."

Though analysts expected Gateway to have no problem clearing net income of 36 cents per share, several said Gateway's revenue might be lighter than initial expectations of about $2.15 billion.

PaineWebber's Don Young expected ISP subscriptions to increase by 300,000 to 400,000 accounts per quarter. However, the company this quarter reported 250,000 new subscriptions.

Todd said the company was pleased with results for the 92 store-within-a-store locations it has launched with OfficeMax. Unit sales have been strong, and average selling prices have been in line with Gateway's typical prices, which are higher than those typically seen at retail, Todd said.

"We're selling more PCs than they were selling before," Todd said.

Todd also said the company is comfortable with the supply of components it is getting.

"Right now, we feel we're in pretty good shape," he said.

Todd said the company was pleased with results for the 92 store-within-a-store locations it has launched with OfficeMax. Unit sales have been strong, and average selling prices have been in line with Gateway's typical prices, which are higher than those typically seen at retail, Todd said.

"We're selling more PCs than they were selling before," Todd said.

Todd also said the company is comfortable with the supply of components it is getting.

"Right now, we feel we're in pretty good shape," he said.

Gateway followed through on a pledge to increase the amount of processors it uses from Advanced Micro Devices, Todd said. However, Todd said it was too early to say what the mix of AMD and Intel chips would be for the second half of the year.

Todd and Gateway chief executive Jeff Weitzen also noted that of non-PC revenue, half came from recurring sources such as providing training and Internet service.

Niles said that despite Gateway's problems in its business unit, he is optimistic about the company's prospects.

"We still like the story," Niles said. "We like Gateway's stock quite a bit."