Gateway Reports Robust Quarter, But Analyst Issues Caution

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Computer direct marketer Gateway Inc., North Sioux City, SD, said strong sales in the U.S. consumer market in the first quarter helped the company achieve a 31-percent increase in profits for the period, to $99.58 million, or 62 cents per diluted share, vs. $75.87 million, or 48 cents per diluted share in the first quarter of the preceding year.

Net sales for the quarter, which ended March 31, were $2.1 billion, up about 21 percent over net sales of $1.73 billion in the first quarter of a year ago. The company said the number of units shipped to consumers in the U.S. increased 61 percent over the levels of a year ago, and global shipments increased 42 percent, to 1,085,000 PCs.

Some analysts said Gateway's report, released last week, was particularly impressive in that it followed behind a poor showing from Compaq Computer Corp. The Houston computer maker said price pressures on personal computers and slower than expected results from its high-end servers ate about half the company's projected profits.

But despite beating analysts' expectations by about 2 cents per share for the period and posting sales gains that were stronger than the market overall, Gateway's stock showed little reaction. After starting the day Friday at 69-15/16, it traded down slightly to close at $69-1/2, which is about $15 less than its 52-week high.

Ashok Kumar, an analyst at Piper Jaffray, Minneapolis, who predicted Compaq's difficulties well ahead of time, also predicted that pricing pressures would begin to affect Gateway more strongly in the second quarter. He downgraded his rating on Gateway's stock from "strong buy" to "buy" and revised his estimate for the second quarter to 55 cents per share, in line with analysts' consensus, from 61 cents.

Kumar noted that most of the growth in the consumer segment is in computers priced below $1,000, which is a price niche Gateway has tried to avoid. He said Gateway currently sells less than 10 percent of its PCs for less than $1,000. Kumar also said that overall weakness in the United Kingdom, which accounts for half of Gateway's European business, and aggressive pricing from Compaq and Dell could affect Gateway's second quarter.

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