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Gateway reports a turnaround

The direct PC vendor reports $88.1 million in profits, beating expectations as it names a new president and COO.

Gateway 2000 (GTW), which took a significant loss and announced layoffs in its previous quarter, reported a turnaround and named a new president and chief operating officer yesterday.

The direct seller beat expectations, reporting fourth-quarter net income of $93 million, or 59 cents a share, up from a year ago, when it posted net profits of $88.1 million, or 56 cents a share.

Analysts had pegged the company's earnings at 45 cents a share, according to First Call.

Gateway's revenues reached $1.98 billion, a 28 percent increase from the $1.55 billion the company reported for the same quarter during the previous year.

Jeffrey Weitzen, a former executive vice president of AT&T's business markets division, will be Gateway's new president and chief operating officer, reporting to Ted Waitt, chairman and chief executive. Weitzen will be responsible for directing the company's sales and marketing divisions, manufacturing, engineering, and worldwide business operations. He also will serve as a member of its board of directors.

Gateway stock rose by as much as 12.1 percent today following the release of its earnings report, reaching a high of 38-1/8 before closing the day at 37-1/8, up 3-1/8 over yesterday.

In a conference call, Waitt said that Gateway always is looking to expand its management team, and noted that there likely will be more additions to the company's executive management ranks this year.

In sizing up the quarter, Waitt said consumer sales were strong while portable computer sales grew aggressively.

"We were up significantly on a quarter-to-quarter basis and year to year," Waitt said. "Our forecasting was accurate, we generated a lot of cash, reduced inventory, and added 22 stores."

He said also that the company had no plans to make any acquisitions in the near future.

"Right now we've been very internally focused on getting the basics of business [executed]," Waitt said. "I don't feel we need to do acquisitions to grow the business--we need to execute the plans we have in place."

Gateway shipped 850,000 units during the quarter, a 38 percent increase over the previous year.

"Their unit growth was up 35 percent sequentially, and virtually all of their growth came from North America," said Ashok Kumar, an analyst with Loewenbaum & Co. "That was very good considering North America grew only 9 percent [for the industry overall]. That means they captured significant market share."

However, the company's average price per unit for the quarter decreased 8 percent from a year ago, to $2,326 per unit. Gross margins also fell, to 18 percent from a relatively high level last year. Gateway said those margins beat its internal forecast.

Inventory management improved in the quarter, with inventories reduced by 34 percent from the previous quarter's levels.

Gateway continued to perform well in the small- to medium-sized business segment as well, registering a 7.1 percent market share for calendar third-quarter shipments of desktop PCs, according to International Data Corporation (IDC). That figure represents a 45 percent increase over the same quarter a year ago.

The company is continuing efforts to market its E-Series PCs to address the needs of large businesses, but may find little fuel for growth in that market segment going forward. Analysts say corporate PC purchases in 1998 will slow down without a major operating system upgrade from Microsoft to fuel demand.

In the most recent quarter, the company introduced the Perfect Scholar line of PCs, which bundles educational software titles on systems. The titles, aimed at tapping into the educational computing market, covers reading, writing, math, and algebra for students between 4th and 12th grades. According to IDC, nearly 45 percent of U.S. households with children make their PC-purchasing plans with educational assistance in mind.