MMX sales spur Gateway profits

Even as competition heats up in the direct-sales market, Gateway 2000 posted a 34 percent jump in profits, due to strength in international markets and the popularity of Intel's (INTC) processor with MMX capabilities.

Gateway reported its earnings after the markets closed, but its stock got a 2-1/2 point boost to close at 58-3/8, from yesterday's close of 55-7/8.

Net income for the quarter ending March 31, was $6.7 million, or 86 cents a share, up 34 percent from $50.5 million, or 65 cents a share, in the first quarter last year. Wall Street was expecting the computer maker to report profits of 86 cents a share, according to First Call.

Revenue for the quarter was $1.4 billion, a 24 percent increase from last year's revenue of $1.1 billion, while unit shipment grew 39 percent. The company said average unit prices were about 11 percent lower than the first quarter of 1996, which slowed revenue growth.

Internationally, sales were strong as Europe shipments increased 41 percent while shipments in the Asia/Pacific region were up 155 percent. International sales represent 18 percent of the company's revenue and Intel's processor with MMX made up nearly one-third of total global shipments.

But despite the company's continued growth, analysts have said that the company can't just sit back and relax in the consumer and small business market if it wants to remain competitive.

"Gateway's strong position in the market to [computer enthusiasts] was a springboard into small business and a broader swath of the consumer market. More recently, the growth of its brand name and overall image has attracted the attention of the large corporate market as well," said Daniel Kunstler, an analyst with JP Morgan, in a recent report.

If Gateway is to strengthen its appeal to budget-conscious corporate heavyweights, the company needs to offer a line of basic server products to capture customers who bundle orders for PCs and PC servers, Kunstler added.

Other analysts foresee Gateway nudging into the server market. "We expect to hear more details surrounding Gateway's strategy to shift its business mix towards the corporate market. We believe this shift has the potential to increase margins, particularly as Gateway formally enters the more profitable PC server space which we expect may occur in 1998," said a recent Lehman Brothers report.

The report added that the shift towards the corporate business has the potential to enhance margins, driven by higher margin product lines such as servers. Other more immediate margin-enhancing opportunities include a greater mix of international and notebook sales.

Gateway said that during the rest of the second quarter its aggressive expansion into corporate markets will offset April, historically the softest month of the year. The company added that new products and technology will also fuel business.

Analyst are concerned that Gateway relies too heavily on the desktop and portable markets in the United States. Those markets are tagged to become increasingly competitive during the coming year.

In particular, Compaq has stated its intention to double its direct response sales force during the coming year to compete with Gateway and Dell (DELLR), which could take a toll on Gateway's margins, said a Salomon Brother's report.