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Gateway Reports 39% Gain in 4th-Quarter Earnings

Gateway Inc. posted double-digit gains in sales and earnings for the fourth quarter as its shift toward retail sales helped it compensate for slower growth in its traditional direct marketing channels.

The Sioux City, SD-based computer maker said its profits for the quarter were $129.14 million, up 39 percent from profits of $92.91 million in the year-ago fourth quarter. Earnings per share in the most recent period totaled 81 cents on a fully diluted basis, compared with 59 cents per fully diluted share in the fourth quarter of a year ago. Revenues for the fourth quarter, which ended Dec. 31, totaled $2.31 billion, up 17 percent from revenues of $1.98 billion in the fourth quarter of a year ago.

The company said its average unit prices decreased 14 percent in the fourth quarter to $2,003 vs. $2,326 in the fourth quarter of a year ago.

For the year, Gateway posted revenues of $7.47 billion, up about 19 percent from year-ago revenues of $6.29 billion. Profits for the year were $346.4 million or $2.18 per share, which was more than triple its year-ago profits of $109.8 million or 70 cents per share. The earlier period included one-time charges of $113.84 million.

“We delivered record results across all major aspects of our business in the fourth quarter,” said Gateway president/CEO Ted Waitt. “Improved execution and solid fundamentals allowed us to exit the year with excellent momentum.”

Despite the fiscal gains, however, at least one analyst expressed concern that the company was migrating away from its proven direct-sales model in favor of a retail strategy dependent on the volatile consumer market. The company has opened about 144 Gateway Country catalog-showroom-style retail outlets to sell its computers, including more than 100 during the past year, which accounted for nearly 95 percent of its incremental sales gains in 1998, according to analyst Ashok Kumar of Piper Jaffray, Minneapolis.

“They are morphing from being a traditional direct marketer,” he said. “What we see happening is the incremental store contribution decreasing and a dramatic contraction in telesales.”

Although he said Gateway's strategy has not yet impeded the company's earnings, Kumar said he feared that if the consumer market for computers begins to slow, Gateway will be stuck with the overhead that accompanies brick-and-mortar retailing.

But another analyst, Jimmy Johnson of A.G. Edwards & Sons, St. Louis, said he thinks the retail outlets — which are annualizing at about $4 million in sales per unit — are proving themselves to be a productive investment.

“The Gateway Country Store is just a touch-and-feel front for their direct marketing strategy,” he said. “They don't have any inventory there.”

In addition, he said, the stores are doubling as satellite bases for the company's outbound sales force.

Kumar also criticized Gateway's year-end report because the company's growth in unit sales was below its own projections. The company said it sold 1.15 million machines in the quarter, an increase of 35 percent year-over-year, but lower than the 40-percent increase the company had predicted.

Johnson, however, countered that the increase was respectable in its own right. “It was just an all-around great quarter,” he said, adding that Gateway's improved margins and gains in Europe also contributed to his favorable outlook on the company's stock.

Citing the success of its YourWare initiative and Gateway Country, Gateway said its European region posted a 20.9 percent increase in units for the fourth quarter and a 1.6 percent increase in revenues, compared with the prior-year fourth quarter. In the Americas, unit sales grew 34.5 percent and revenues grew 15.9 percent vs. the fourth quarter of a year ago, and in the Asia Pacific region, unit sales grew 73.9 percent and revenues 50.6 percent.

Shares traded up $4.50, closing at $62.50 on Jan. 22, the day following Gateway's earnings announcement.

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