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Gateway meets lowered Street expectations

The PC maker closes out its troubled fiscal year, reporting fourth-quarter earnings that were down 2.4 percent on a yearly basis to $126 million.

PC maker Gateway closed out its fiscal year today, reporting fourth-quarter earnings that were down 2.4 percent on a yearly basis, meeting lowered analyst expectations.

Including charges, San Diego, Calif.-based Gateway said its fourth-quarter earnings reached $126 million, or 38 cents per diluted share, a decline from year-ago results of $129.1 million, or 40 cents per diluted share.

Excluding charges related to an Internet service deal with America Online, Gateway earned 42 cents per diluted share on earnings of $139.3 million, matching consensus estimates from analysts surveyed by First Call/Thomson Financial.

Revenues rose 6 percent to $2.45 billion, compared with year-ago results, based in part on strong increases in PC sales to consumers.

Earlier this month, Gateway warned that earnings would fall short of expectations by about 7 cents per share below previous targets because of a shortage of Intel chips and some pullback in corporate and government sales due to Y2K concerns.

Still, those problems were offset by strong sales of higher-priced consumer PCs and a continuing focus on growing non-hardware revenues. Unit sales were up 18 percent over year-ago results, slightly exceeding industry growth estimates, and gross profit margins reached a record 22.3 percent the company said, up from 21.6 percent in the fourth quarter last year.

Gateway moved this month to address the chip shortfall by saying it would include a 600-MHz Athlon processor in its Select line of consumer PCs, with faster chips slated to appear in other Gateway systems in the near future.

At 1 p.m. PST, the close of regular trading, Gateway shares were up $4 to $60.88. Shares fell as low as $57.06 in after-hours trading subsequent to the release of the earnings.

"The fourth quarter is behind us in every respect except one: What we've learned [in terms of component supplies] we've already applied," Gateway's newly named chief executive Jeff Weitzen said in an conference call with financial analysts, referring to the decision to use AMD processors.

Weitzen chose to focus on the outlook for the new year, rather than last quarter's disappointing results. The deal with AOL will figure prominently in adding to Gateway's profits, executives said today.

Gateway signed a far-ranging pact with AOL in October that included making AOL the de facto Internet service provider for Gateway customers. Under the terms of the deal, AOL's flagship service will be marketed alongside Gateway.net, Gateway's Internet access service, on all Gateway computers.

Gateway said it added 400,000 new subscribers in the quarter to its Internet service with AOL, which is double the rate it signed on new customers during the previous quarter. Gateway's ISP subscriber base now stands at 1 million customers.

Gateway CFO John Todd said those customers represent a source of recurring revenue for the company that will help boost profit margins throughout fiscal 2000. In fact, the company is aiming to have at least 10 percent of its pretax profit come from these ongoing revenue streams.

Further down the road, Weitzen said the company is readying the release of new information appliances stemming from joint work with AOL. The devices themselves will not be customized, like PCs, and will offer fixed-location, mobile and "ultramobile" devices like pagers.

Also, Weitzen hinted that Gateway is looking at ways to enter into the ASP (application service provider) market to address growing interest on the part of its small business customers to "rent" applications.

The company further said it increased its sales over the Web by more than 100 percent over the previous year. Gateway is offering a $25 discount to customers who order systems online as a means to shift people toward using the Web, which is a lower-cost means for order entry than the customary telephone operator.