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Gateway hits 1Q earnings estimates, but sales disappoint

    Gateway met analysts' estimates in its first quarter Thursday, earning $136 million, or 41 cents a share, on sales of $2.34 billion.

    First Call consensus expected the PC manufacturer to earn 41 cents a share in the quarter.

    Ahead of the earnings report, Gateway (NYSE: GTW) closed off 4 1/8 to 51 1/8.

    The $2.34 billion in sales represents an 11 percent improvement from the year-ago quarter when it raked in $99.5 million, or 31 cents a share, on sales of $2.1 billion.

    "As we look at our Q1 results, I would characterize them as mixed," CFO John Todd said during a Thursday afternoon conference call with analysts. "The revenue results were somewhat disappointing, with the business-to-business not coming back as strongly as we expected."

    Company executives said a sales slump for most of quarter pushed business unit sales down 19 percent from the year-ago quarter. Gateway saw improvement each month, with March doing far better than January, Todd said.

    The company remains comfortable with current analyst estimates, which call for profits of $1.82 per share for 2000, including 36 cents per share in the second quarter.

    Expect a revenue decline ranging between 8 and 9 percent in the second quarter, consistent with past second quarter trends, Todd said.

    In the first quarter, Gateway recorded sales growth in excess of 25 percent in its consumer PC business as well as total sales to the Asia Pacific, European, Middle Eastern and African regions.

    Gateway said growth in its telephone sales and online orders helped push consumer PC sales up 27 percent from the year-ago quarter. The company credited increased availability of mid-range microprocessors and motherboards for the its ability to meet increased demand.

    The company's joint ISP business with America Online Inc. (NYSE: AOL) continued to prosper, adding another 300,000 subscribers in the quarter.

    In fact, non-PC sales represents 25 percent of the company's total sales this quarter. Gateway executives during Thursday's call continued to emphasize their "Beyond the Box" strategy to move the company away from its reliance on pure hardware revenue and more to services attached to the PC, such as ISPs, training and financing.

    Recurring revenue from services generated 14 percent of the company's net income, up from 10 percent in the previous quarter. Gateway remains on track to get 40 percent of total income from Beyond the Box by the end of the year, with 25 percent of that as recurring income, Todd said.

    Sales into the Asia Pacific region jumped 27 percent, fueled by strong sales in Japan and throughout Southeast Asia.

    While Gateway did manage to meet Street estimates this quarter, its sluggish business sales clearly held it back.

    "While we're clearly disappointed with our business performance for the first quarter, we're continuing to intensify our focus on our target markets of small and medium businesses, government and education," CEO Jeff Weitzen said. "And we intend to leverage our government and education sales during the second quarter peak selling season for those segments."

    Looking ahead, Gateway hopes a trio of new Internet appliances will spark sales throughout the rest of the fiscal year.

    The devices, a wireless web pad, a countertop appliance and a desktop appliance, are designed to run AOL content on top of a Linux operating system. The first of the devices will debut by this year's holiday season.

    Last quarter, Gateway earned $139.3 million, or 42 cents a share, on sales of $2.45 billion.

    Its shares moved up to a 52-week high of 84 in November after hitting a low of 28 3/8 in May.

    Analysts are expecting a profit of $1.83 a share in the fiscal year.

    Twenty-two of the 24 analysts following the stock rate it either a "buy" or "strong buy."

    -- Sergio G. Non contributed to this report.