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Gateway edges past 2Q expectations

Gateway (NYSE: GTW) beat the consensus by a penny in the second quarter.

After market close Thursday, the second largest direct seller of PCs posted second quarter net income of $122 million, or 37 cents per share. First Call's survey of 22 analysts predicted a profit of 36 cents per share.

Second quarter revenue increased 12 percent year-over-year to $2.14 billion. Gateway's consumer division led with 32 percent revenue growth and 39 percent unit growth. Business sales fell 10 percent year-over-year, although that decline was less than the first quarter's 19 percent drop.

Gateway executives remained optimistic about the second half, traditionally the stronger part of the year. First Call currently predicts a profit of 45 cents per share for Gateway's third quarter. "We're comfortable with consensus estimates," CFO John Todd told Reuters.

The company has already met its full-year target of deriving 40 percent of overall income from non-PC sales and that the company was now raising that target to 45 percent, Todd added. Gateway wants to boost margins by reducing the company's reliance on pure hardware.

Second quarter gross margin was 23.3 percent, the company's highest ever.

"For the second time in two quarters, we have grown net income at triple the rate of our revenue growth, meaning we're getting the lion's share of profitable PC sales," said Jeff Weitzen, president and CEO.

Productivity improvements, cheaper parts, and the growth of higher margin "Beyond the Box" businesses such as training and Internet access combined to drive operating income up 37 percent, or three times faster than revenue growth. Half of the non-PC income came in the form of recurring income, Todd said.

Gateway's added 31 standalone stores to its physical retail chain during the second quarter. The company now has 349 Gateway Country standalone outlets around the world. The company also had 409 "store-within-a-store" outlets at the end of the second quarter.

Shares of Gateway traded at 72 in afterhours activity on Thursday, up 1 1/16 from Wednesday's close.