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Gateway earnings up with ISP business growth

The PC maker tops expectations by a penny, posting earnings of 56 cents per share and demonstrating that embracing the role of an Internet service provider is working.

Gateway beat Wall Street expectations by a penny, posting earnings of 56 cents per share and demonstrating that embracing the role of an Internet service provider is succeeding.

Formerly best-known for selling directly to customers, Gateway announced second-quarter earnings of $89 million, on revenues of $1.9 billion. During the same period last year, the company reported revenues of $1.6 billion.

Income increased 47 percent from the year-ago quarter's earnings of 38 cents per share. Twenty-three analysts polled by First Call expected Gateway to post an average of 55 cents per share.

Gateway chief financial officer John Todd attributed the company's performance to its new Internet strategy.

"Our core PC business is still extremely strong...But we're going to continue to grow our solution and support around the box," he said, referring to PC systems. "We've done a good job of outpacing the market," he added.

In the last year, Gateway has revamped its strategy to supplement profits from hardware sales by leaning more on revenues from Internet service contracts and e-commerce sales from its online store. The company said today its non-PC income now accounts for 10 percent of the company's earnings.

Along with Dell, the company has led the revolution among PC makers, which are adding Internet services to their hardware manufacturing business. This quarter, company executives have said they are interested in acquiring more Net firms, toward the end of providing more lucrative online training and software products.

The company's Gateway.net Internet service added about 200,000 subscribers, bringing the total base to around 400,000, the company said.

Already this year, Gateway has purchased a stake in online computer and peripheral store NECX to launch its SpotShop store. Gateway also has invested $200 million in Internet operating company CMGI.

It is rumored to be close to acquiring ISP Earthlink outright, toward the end of providing all Internet-related services directly to its customers.

"We will be expanding capabilities in our commerce area, expand our ISP, our Web capabilities," Todd said, while denying that the company will acquire Earthlink or any ISP in the near future. "We are in no discussions for acquisition of an ISP at this time," he said.

Gateway's Net strategy is borne of the continuing downward spiral of PC prices. This quarter, PCs shipped increased by 36 percent to about 1 million units, while revenues only increased by 18 percent.

"Our average selling prices were down about 1.7 percent, vs. the entire market, which was down more than 6 percent," Todd said. "Our model is flexible, which allows us to do whatever we need to do for our customers."

Despite earlier fears about price declines, hyperactive competition, and a slowdown in consumer and spending due to the Year 2000 bug, hardware manufacturers have for the most part managed to post respectable earnings for the second quarter. Gateway topped its performance last quarter, a period company president referred to as "our best quarter ever."