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Gateway posts profit, aided by Microsoft gain

PC maker says "gross margin pressures" in several businesses contributed to a lower earnings forecast for 2005.

Helped by a settlement payment from Microsoft, PC maker Gateway reported on Monday a quarterly net profit after a year-ago loss. But investors focused on the company's gross margins in the quarter and sent its shares plunging 9 percent.

The third-largest U.S. PC maker reported its second-quarter net income rose to $17.2 million, or 5 cents per share, compared with a net loss of $339 million, or 91 cents per share, this same time last year. Analysts expected Gateway to earn 2 cents per share, according to a survey by Thomson First Call.

The net profit was Gateway's first after 13 consecutive quarters of net losses, and revenue growth versus the first quarter was the best in a decade, Gateway president and CEO Wayne Inouye said during a conference call with analysts.

"We believe this is all continuing evidence that our strategy and plans are sound and that Gateway is on the right track to achieve our long-term goals," Inouye said.

Like Dell last week, Gateway's revenue also missed analysts' forecasts.

"We had to contend with gross margin pressure in all of our major business units in the second quarter due to competitive pressures," Inouye said in a statement.

Gateway reduced its full-year 2005 revenue forecast to $3.9 billion to $4 billion from $4 billion to $4.25 billion. Earnings per share before items are now expected at 13 cents and 15 cents, down from its earlier forecast of 17 cents to 19 cents.

Shares of Dell, Intel and Hewlett-Packard were little changed after the news.

The Irvine, Calif.-based PC manufacturer was scheduled to report results in late July but said it delayed reporting pending advice from the U.S. Securities and Exchange Commission on how to account for the payment from Microsoft.

On April 11, Microsoft said it would pay Gateway $150 million over four years to resolve long-standing antitrust issues.

Gateway said its revenue amounted to $873 million, compared with $838 million in the first quarter and $838 million a year earlier. The company said it is still expecting to report an additional $25 million worth of products, which were still in transit as of June 30, 2005.

Inouye said the company is making "important strides" in the face of tough competition from Dell, Hewlett-Packard and Lenovo.

Nowhere was that more evident than in retail sales, which continues to be Gateway's strongest selling space. More than 750,000 Gateway and eMachines PCs worth revenues of $490 million were sold in the last three months through more than 7,000 retail locations in the U.S. and Canada. That number now includes a new deal to sell PCs through 875 Staples stores in the U.S.

Conversely, Gateway said it was effectively priced out of the market by the competition in the direct sales category. Direct sales revenue decreased 26 percent and PC units decreased 37 percent. The division still managed to ship 48,000 PCs and eke out revenue of $111 million.

Gateway's corporate contracts brought in revenue of $272 million, with sales of 211,000 PCs.

Shares of Gateway fell to $3.55 on the Inet electronic brokerage network after the close of the regular trading session. Its stock closed up 8 cents, or 2.1 percent, at $3.89 on the New York Stock Exchange on Monday.

Reuters contributed to this report.