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Gateway's earnings jump

On the heels of a big Gateway-AOL announcement, the PC maker earns $113.2 million for its third quarter as the company's moves to focus on services continues to pay off.

    On the heels of a big Gateway-AOL announcement, the PC maker said it earned $113.2 million for its third quarter as the company's moves to focus on services continues to pay off.

    Earlier, America Online said it will invest $800 million in Gateway as part of a far-ranging deal to jointly market products and services. (See related story.)

    Gateway said its third-quarter earnings reached 35 cents per diluted share, an increase of 38 percent compared to the results for the same period a year ago. The company was expected to earn 34 cents a share in the third quarter, according to the consensus estimates from analysts surveyed by First Call.

    Revenues rose 20 percent, compared to year ago results, to $2.18 billion, based in part on strong increases in PC sales to the consumer market in the back-to-school season, the company said.

    Gateway also pointed out that income from non-PC sources now stands at 15 percent of the company's overall revenue, and the company said alternative revenue is on a pace to reach the $1-billion-a-year mark.

    PC companies, in general, have been experimenting with a variety of methods for boosting the bottom line as prices and profit margins on PCs have continued to drop under extremely competitive market conditions. These services include areas like bundling Net access with the PC.

    "Our revenue stream is growing richer and more diverse quarter-by-quarter, giving us a very strong and unique position in the industry," Ted Waitt, Gateway's chairman and CEO, said in a statement.

    Executives said today that the company is aiming to have 30 percent of its income to eventually come from non-PC sources.

    Gateway said PC shipments increased 39 percent for the quarter, driven largely by sales to the consumer market. PC sales in international markets grew 55 percent on a yearly basis, and revenue growth, particularly in Asian markets, topped 34 percent against year ago results.

    The news of Gateway's profits comes as companies like IBM and Apple have hit rough spots. IBM said it would only sell its Aptiva consumer computers over the Internet starting next year--with the exception of OfficeMax--while Apple and other PC makers have seen by financial results hurt by the Taiwan earthquake and a rise in memory chip prices.

    Focus on AOL deal
    Although the company posted strong earnings results, Wall Street's focus was clearly on the deal with AOL.

    In a conference call with analysts, Gateway executives emphasized the benefits to the company's bottom line.

    Waitt said in the conference call that Gateway can "significantly" increase the number of Gateway customers that become Internet subscribers. These additional customers, along with the customers the company already has, will represent more profit because of an arrangment for AOL to manage the services, as well as new profit-sharing arrangements between the two companies.

    "What we were not interested in with AOL was a bounty relationship where we lost the relationship with the customer," Waitt said during the call. He was referring to the standard PC company practice of having AOL pay a set fee for new customers it gains when a PC is sold and a customer signs up for its service.

    Gateway instead wants to take part in recurring revenue streams after it sells the PC. The two will be selling software through an online store, offering training services through Gateway's Country Store outlets, and eventually selling "information appliances" such as stand-alone email devices as well. Both will share an unspecified proportion of operating profits, said Jeff Weitzen, Gateway's president and COO.

    The AOL investment wasn't that company's first in a PC maker. In June, AOL invested in Emachines, although the amount was significantly less than today's reported investment in Gateway.