Gateway milks PC surge

The computer maker posts record revenue and earnings after experiencing a holly, jolly holiday season.

3 min read
Gateway, the second largest direct seller of computers, today posted record revenue and earnings after experiencing strong sales in the Christmas season.

For the three months ending December 31 of last year, Gateway recorded record profits of 81 cents per share, compared to analyst consensus estimates of 78 cents per share. The earnings represented a 27 percent gain over the 59 cents per share posted in the same quarter a year earlier.

Gateway also reported $2.31 billion in revenues for the fourth fiscal quarter of 1998, a 17 percent increase from 1998's first-quarter revenues of $1.98 billion. Despite significant PC pricing pressure, the company was able to increase its gross margins for the fifth straight quarter, reaching a new high of 21.6 percent compared with 18 percent last year.

The increased margins were the result of offering a wider range of products, continued reductions in component costs, and more selective price reductions, the company said.

"We grew twice as fast as the market overall, and even faster in the consumer segment," said Ted Waitt, chairman and CEO of Gateway in a prepared statement. "Improved execution and solid fundamentals allowed us to exit the year with excellent momentum," he noted.

In a conference call, Waitt said the company's board has approved a $200 million stock buyback program that will start in the first quarter of this year.

"Gateway's stock has lagged some of the other PC stocks, because there was concern earlier in the quarter that their revenues weren't going to be as strong," observed research analyst Philip Rueppel with BT Alex Brown. By posting such strong earnings results, the stock could be poised to rally, although some analysts remained disappointed that the revenue and shipment growth weren't as good as hoped for.

During the quarter, the company went about business as usual, issuing new desktop, portable, and server products, usually on schedule with the release of new chips from Intel. But behind the scenes the company was busy building up its ranks with six new executives--changes that won't show results until later in 1999 but are significant nonetheless.

Gateway's growth in Europe has been lagging that of other PC vendors such as Dell, Rueppel said. Gateway reported that European sales grew 20.9 percent, although revenues grew at a tepid 1.6 percent compared to fourth quarter last year. Sales growth there came about as a result of the opening of new company-owned stores called "Country Stores" as well as the introduction of new financing programs, Jeff Weitzen, Gateway's president and COO, told analysts, noting Gateway said it has an executive team in place in Europe that can help drive growth.

Growth was strong in the North and South America region, where unit sales grew 34.5 percent and revenue increased 15.9 percent over 1997's fourth quarter. Revenue growth in the Asia Pacific market increased 50.6 percent.

Stores, other ventures boost bottom line
Adding seasoned executives to the company still can't stop the pressure on profit margins for hardware makers, so, like other companies, Gateway is looking to root out supplemental sources of revenue.

Gateway's response so far has been the YourWare program, which offers lending options, connection to the Internet, and third-party software to customers.

In 1999, the company will expand the YourWare program as well as begin to offer a wider variety of third-party products on their Web site.

The company partly attributed its increased profitability to efforts to diversify its revenue stream. The company opened up over 50 new stores during the quarter, bringing the total number of Gateway-operated stores to more than 140.

Also, the company is migrating some 200,000 customers of its ISP service to a new service provider and expects to market this service, called "Gateway.net," more aggressively. Although the company managed to sign on 100,000 new customers during the fourth quarter, executives said they hope to have 400,000 customers signed up by the middle of the year.

Analysts said unit shipment growth was below the 40 percent some had expected and revenue was slightly lower than forecast. "There was some hope that the top line would be better," said analyst Mark Specker of SoundView Financial Group, who rates the stock "hold."

Bloomberg contributed to this report.