GTW Gateway

- Net income of $1.9 million, or $0.01 per diluted share, versus a net loss of $7.7 million a year ago IRVINE, Calif., Aug. 2 /PRNewswire-FirstCall/ -- Gateway, Inc. (NYSE:GTW) today reported results for its second quarter ended June 30, 2007. Revenue amounted to $841 million, down from $919 million a year earlier. Retail revenue grew to $614 million from $592 million a year earlier, but was offset by continuing revenue declines in Professional and Direct. Gross margin for the second quarter was 7.6 percent, compared with 4.9 percent in the prior quarter and 5.5 percent in the second quarter of 2006. Retail gross margin for the second quarter was 5.6 percent, compared with 3.1 percent in the prior quarter and 3.7 percent a year ago. Operating income was $5.9 million, compared to a loss of $6.7 million in the first quarter and a loss of $6.9 million a year earlier. Net income equaled $1.9 million, or 1 cent per diluted share. This compares with a net loss of $8.6 million, or 2 cents per diluted share in the prior quarter, and a net loss of $7.7 million, or 2 cents per diluted share a year earlier. "In the quarter in which Gateway sold its 50 millionth PC, we improved our year-over-year operating results for the third consecutive quarter," said Ed Coleman, Gateway's chief executive officer. "We showed revenue growth and significant margin improvement in our Retail business. While revenue declined in our Professional and Direct segments, we significantly increased Professional segment contribution by increasing gross margin and reducing expenses. These improvements, coupled with a continuing focus on managing our costs, resulted in this quarter's profitable performance." SG&A expense in the second quarter was $66.6 million, or 7.9 percent of revenue, up from $65.1 million in the prior quarter, and up from $66.1 million in the second quarter of 2006. The year-over-year increase is primarily due to an $8.4 million release of a prior disclosed sales tax reserve in 2006, which was not repeated in 2007, and an increase in depreciation expense related to the implementation of a new ERP system, partially offset by reductions in marketing and headcount-related expenses, settlement expenses and legal fees. As part of Gateway's 2005 Marketing, Development and Settlement Agreement with Microsoft, second quarter results included the continuing quarterly benefit of $8.6 million. The company sold 1,088,400 PC units in the second quarter, down 13 percent sequentially and down 7 percent year-over-year. Segment Results The Retail segment, which includes international sales, delivered second quarter revenue of $614 million, down 20 percent sequentially and up 4 percent year-over-year. Retail PC unit sales equaled 938,700, down 14 percent sequentially and down 1 percent year-over-year. The sequential decrease in units and revenue reflects seasonal factors. The year-over-year decrease in units and increase in revenue reflects a shift to higher opening price points. Retail gross margin in the second quarter was $34.6 million or 5.6 percent of revenue, up from $23.6 million or 3.1 percent of revenue in the prior quarter, and up from $21.9 million or 3.7 percent of revenue in the second quarter of 2006. Retail segment contribution was $26.0 million (after Retail SG&A expenses of $8.6 million), up from $19.0 million in the prior quarter (after expenses of $4.6 million) and up from $17.2 million a year ago (after expenses of $4.6 million). The sequential and year-over year improvement in gross margin and segment contribution is primarily due to component cost and freight savings, as well as product and brand mix changes within the segment, partially offset by increased SG&A expense. The Professional segment delivered revenue of $173 million in the second quarter, up 11 percent sequentially and down 31 percent year-over-year. Professional PC unit sales equaled 119,400, up 7 percent sequentially and down 36 percent year-over-year. The sequential increases in revenue and unit sales were predominantly due to seasonal factors and higher average unit prices due to product mix. The year-over-year decreases in revenue and unit sales were due to greater selectivity in contract bidding and desktop production constraints related to the ramp-up of production at our Nashville facility, partially offset by higher average unit prices due to product mix. Production constraints at Nashville resulted in a significantly higher backlog than normal for Professional at the end of the quarter. Professional gross margin was $21.1 million or 12.2 percent of revenue, up from $10.8 million or 6.9 percent of revenue in the prior quarter and up from $11.1 million or 4.4 percent of revenue in the second quarter of 2006. Professional segment contribution was $8.4 million (after Professional SG&A expenses of $12.7 million), up from a loss of $3.0 million in the prior quarter (after expenses of $13.8 million) and up from a loss of $8.3 million a year ago (after expenses of $19.3 million). The sequential and year-over-year improvements in gross margin and segment contribution were due to management's decision to pursue opportunities on a more selective basis, resulting in better margin management, as well as reduced headcount-related expenses and other expense controls. Additionally, margins in the second quarter of 2006 were negatively impacted by $10 million in one-time warranty and royalty adjustments. The Direct segment delivered revenue of $54 million, down 38 percent sequentially and down 30 percent year-over-year. Direct PC unit sales equaled 30,300, down 35 percent sequentially and down 15 percent year-over-year. The sequential and year-over-year declines in units and revenue reflect declining marketing spend and desktop production constraints at our Nashville facility, as well as declining deferred extended warranty revenue and Internet access subscription revenue share. Direct gross margin was $8.2 million or 15.1 percent of revenue, down from $15.3 million or 17.7 percent of revenue in the prior quarter and down from $17.6 million or 22.9 percent of revenue in the second quarter of 2006. Direct segment contribution was $4.1 million (after Direct SG&A expenses of $4.0 million), down from $8.7 million in the prior quarter (after expenses of $6.6 million) and down from $9.3 million a year ago (after expenses of $8.4 million). The sequential and year-over-year decline in gross margin and segment contribution reflects declining deferred extended warranty revenue and Internet access subscription revenue share, partially offset by reduced headcount-related and marketing expenses. Working Capital Working capital at the end of the quarter was $314 million, which was unchanged from the end of the first quarter. Accounts payable and supplier receivables both dropped to more normal levels from the distorted levels caused by component receiving and invoicing delays in the first quarter. Accounts payable were $610 million (71 days) down from $861 million (81 days) as we shortened our payables in support of our ODM relationships. Supplier receivables decreased to $275 million (32 days) from $479 million (45 days) due to timely invoicing of components sales to our ODMs. Accounts payable, net of supplier receivables, decreased to $335 million from $382 million at the end of the first quarter. Net accounts receivable were $314 million (34 days) up from $303 million (27 days) at the end of the first quarter. Net inventory closed at $160 million (19 days) up from $131 million (12 days) at the end of the first quarter due to increased finished goods inventory. Other current assets dropped to $111 million from $203 million at the end of the first quarter in part due to improved collection of vendor credit programs. The net result is that cash and marketable securities decreased to $255 million from $317 million at the end of the first quarter, as more working capital was utilized in assets supporting the business. Cash flow, defined as earnings before interest and taxes, plus depreciation and amortization, minus capital expenditures, rose to $7.7 million, an increase of $17 million from ($9.3) million in the first quarter, and an increase of $23 million from ($15.3) million in the second quarter of 2006. This reflects improvement in operating income, greater depreciation and amortization and a lower capital expenditure budget. At the end of the second quarter, Gateway had approximately $84 million in income tax reserves attributable to past periods. Gateway is in the process of concluding audits of these past periods and believes that a significant portion of these reserves will be released over the next few quarters, which would benefit its reported net income. Conference Call Information Gateway will host a conference call for analysts on Thursday, Aug. 2 at 10:00 am EDT/7:00 am PDT, which will be accessible via live audio web cast at http://www.gateway.com/. About Gateway Since its founding in 1985, Irvine, Calif.-based Gateway (NYSE:GTW) has been a technology pioneer, offering award-winning PCs and related products to consumers, businesses, government agencies and schools. Gateway is the third largest PC company in the U.S. and among the top ten worldwide. The company's value-based eMachines brand is sold exclusively by leading retailers worldwide, while the premium Gateway line is available at major retailers, over the web and phone, and through its direct and indirect sales force. See http://www.gateway.com/ for more information. Special note This press release contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not materialize or prove incorrect, could cause Gateway's results to differ materially from those expressed or implied by such forward-looking statements. All statements, other than statements of historical fact, are statements that could be forward- looking statements, including any projections or preliminary estimates of earnings, revenues, or other financial items; any statements of plans, strategies and objectives of management for future operations; the extent of seasonal changes in demand; any statements regarding proposed new products, services or developments; any statements regarding future economic conditions or performance; statements of belief and any statement of assumptions underlying any of the foregoing. The risks that contribute to the uncertain nature of these statements include, among others, risks related to shifting our distribution model to third-party retail; competitive factors and pricing pressures, including the impact of aggressive pricing cuts by larger competitors; general conditions in the personal computing industry, including changes in overall demand and average selling prices, shifts from desktops to mobile computing products and information appliances and the impact of new microprocessors and operating software; the ability to simplify the company's business, change its distribution model and restructure its operations and cost structure; component supply shortages; short product cycles; the ability to access new technology; infrastructure requirements; risks of international business; foreign currency fluctuations; risks relating to new or acquired businesses, joint ventures and strategic alliances; risks related to financing customer orders; changes in accounting rules; the impact of litigation and government regulation generally; inventory risks due to shifts in market demand; the impact of employee reductions and management changes and additions; and general economic conditions, and other risks described from time to time in Gateway's Securities and Exchange Commission periodic reports and filings. Gateway assumes no obligation to update any forward-looking statements to reflect events that occur or circumstances that exist after the date on which they were made. Gateway, Inc. Consolidated Condensed Statements of Operations (in thousands, except per share amounts) (unaudited) Three Months Ended Six Months Ended June 30, June 30, 2007 2006 2007 2006 Net sales $840,625 $919,312 $1,849,329 $1,997,134 Cost of goods sold 776,756 868,736 1,735,741 1,867,830 Gross profit 63,869 50,576 113,588 129,304 Selling, general, and administrative expenses 66,603 66,149 131,685 169,246 Microsoft benefit 8,625 8,625 17,250 17,250 Operating income (loss) 5,891 (6,948) (847) (22,692) Other income (loss), net (988) (1,317) (281) 920 Minority interest (79) -- (108) -- Income (loss) before income taxes 4,824 (8,265) (1,236) (21,772) Benefit (Provision) for income taxes (2,911) 585 (5,430) 1,755 Net income (loss) $1,913 $(7,680) $(6,666) $(20,017) Net income (loss) per share: Basic $0.01 $(0.02) $(0.02) $(0.05) Diluted $0.01 $(0.02) $(0.02) $(0.05) Weighted average shares outstanding: Basic 371,857 372,089 371,666 372,531 Diluted 371,928 372,089 371,666 372,531 Gateway, Inc. Consolidated Condensed Balance Sheets (in thousands) (unaudited) June 30, March 31, December 31, 2007 2007 2006 ASSETS: Current assets: Cash and cash equivalents $225,621 $287,184 $345,677 Marketable securities 29,611 30,289 70,658 Accounts receivable, net 314,163 303,020 274,782 Inventory, net 160,431 130,616 97,187 Other 444,749 735,257 462,789 Total current assets 1,174,575 1,486,366 1,251,093 Property, plant, and equipment, net 110,158 108,249 110,931 Intangibles, net 68,909 71,970 75,058 Goodwill and non-amortizable intangible assets 205,219 205,219 205,219 Other assets, net 10,666 10,231 13,934 $1,569,527 $1,882,035 $1,656,235 LIABILITIES AND EQUITY: Current liabilities: Accounts payable $609,900 $860,471 $612,639 Accrued liabilities 159,265 191,314 230,115 Accrued royalties 58,916 85,142 54,521 Other current liabilities 32,406 35,178 121,659 Total current liabilities 860,487 1,172,105 1,018,934 Long-term debt 300,000 300,000 300,000 Other long-term liabilities 145,382 149,387 65,875 Total liabilities 1,305,869 1,621,492 1,384,809 Minority interest 2,526 2,447 2,418 Stockholders' equity 261,132 258,096 269,008 $1,569,527 $1,882,035 $1,656,235 Gateway, Inc. Consolidated Condensed Statements of Cash Flows (in thousands) (unaudited) Six Months Ended June 30, 2007 2006 Cash flows from operating activities: Net loss $(6,666) $(20,017) Adjustments to reconcile net cash to net cash provided by operating activities: Write-down of long-lived assets -- 1,176 Depreciation and amortization 19,339 13,471 Provision for doubtful accounts receivable 8,457 2,083 Stock-based compensation 2,216 2,149 Loss on investments 55 66 Loss on disposal of property, plant and equipment 1 -- Changes in operating assets and liabilities Accounts receivable (49,614) 23,343 Inventory (63,244) 71,536 Other assets 23,085 55,312 Accounts payable (3,571) (162,640) Accrued liabilities (63,173) (723) Accrued royalties 4,395 (1,327) Other liabilities (12,467) (25,533) Net cash used in operating activities (141,187) (41,104) Cash flows from investing activities: Proceeds from sales of available- for-sale securities, net 57,894 113,121 Purchases of available-for-sale securities (16,753) (48,879) Purchases of property, plant and equipment (20,093) (24,093) Proceeds from sale of property, plant and equipment -- 3,731 Net cash provided by investing activities 21,048 43,880 Cash flows from financing activities Repurchase of treasury stock -- (280) Proceeds from common stock exercises 83 5 Net cash provided by (used in) financing activities 83 (275) Net (decrease) increase in cash and cash equivalents (120,056) 2,501 Cash and cash equivalents, beginning of period 345,677 422,488 Cash and cash equivalents, end of period $225,621 $424,989 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Minority interest in earnings $(108) $-- Value of restricted shares withheld for taxes $312 $2,690 SUPPLEMENTAL CASH FLOW INFORMATION Cash received for income taxes, net $103 $153 Cash paid for interest $3,437 $3,215 DATASOURCE: Gateway, Inc. CONTACT: Media, David Hallisey, +1-949-471-7703, ; or Marlys Johnson, +1-605-232-2709, , both of Gateway, Inc. Web site: http://www.gateway.com/

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