Intel Investors - Another Myth Disproved: Pentium III Off to a POOR START.
The following excerpt is from Gateways' Quarterly Report - released last week:
The company successfully launched Intel's new Pentium III chip late in the first quarter and exited the quarter with PIII representing 25% of US. desktop shipments.
Paul
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April 27, 1999 13:39
-GATEWAY: Gateway reports strong first quarter results
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M2 PRESSWIRE-27 April 1999-GATEWAY: Gateway reports strong first quarter results (C)1994-99 M2 COMMUNICATIONS LTD
* Posts Robust US Consumer Growth Three Times Industry Rate
* Shipments increase 42% to 1,085,000
* Sales increase 22% to $2.1 billion
* Income increases 31% to $99.6 million $.62 earnings per diluted share
Reflecting continued momentum across nearly all segments of its global business, including robust 61% unit growth in its US. consumer segment, Gateway today announced earnings results of $.62 per diluted share for the first quarter of 1999.
Gateway attributed its strong US. consumer growth, which tripled the estimated industry consumer growth rate, to several elements: solid execution behind its unique multi-channel strategy, including phone, Web and Gateway Country( stores; increased investment behind building the Gateway brand and continued focus on delivering superior products and services, most notably through the Your:)Ware( consumer program.
In addition, Gateway took a number of significant steps in the first quarter to build a stronger connection to its clients through the Internet. These steps included: launching Gateway My Yahoo!, offering co-branded, personalised Web pages for gateway.netSM users; providing the option to include one year of gateway.netSM Internet access with the purchase of a computer; and investing equity in and forming an alliance with NECX to launch www.SpotShop.com(, Gateway's on-line peripherals store.
Gateway's strong showing in the US. consumer market in the first quarter gives the company an estimated 25% of U. S. consumer PC revenues, meaning one out of every four dollars spent by consumers on PCs in the US. is spent with Gateway.
"The strategy we've been executing for the past year is paying off with real, noticeable momentum in the consumer marketplace," said Ted Waitt, Chairman and Chief Executive Officer. "Gateway and its shareholders are reaping the benefits of a focused effort to expand our client relationship beyond the box. Our consumer business has never been stronger, and now we're positioned to expand that success into the small and mid-sized business arena."
In the first quarter of 1999, Gateway shipped 1,085,000 PCs, a 42% increase from the first quarter 1998. Sales increased 22% to $2.103 billion from $1.728 billion a year ago. Net income increased 31% to $99.6 million or $.62 per diluted share compared to $75.9 million or $.48 per diluted share in the first quarter of 1998.
Quarterly Sales
Gateway's strong quarterly sales were driven by two key factors: substantial growth in the US. and continued momentum in Asia Pacific.
In the US., unit volume increased 42% over the comparable period in 1998, with revenues up 23%. Gateway's US. consumer business showed particular strength, with robust unit growth of 61% and revenue growth of 38%. In Gateway's US. business segment, units increased 23% over last year and revenues were up 6%.
Additionally, Gateway showed dynamic growth in Asia Pacific, where total unit volume increased 96% over 1998 and revenues grew 65%. Japan posted particularly strong gains in the face of continued macro economic challenges, and new and emerging markets also showed significant growth.
Gateway's European region continued its turnaround, with first quarter consumer unit volume in the region posting a 23% gain over the same period last year, and revenues up 1%. The United Kingdom consumer segment showed a strong 32% increase in unit sales in the first quarter, with revenues up 13%. However, due to softness in Europe's business market, unit growth across the region in all segments was flat and revenues were down 13%.
Desktop unit growth was up 42% versus first quarter last year, with revenues up 23%. Portable unit volume was up 47% over the same period last year, with revenues up 23%. The company successfully launched Intel's new Pentium III chip late in the first quarter and exited the quarter with PIII representing 25% of US. desktop shipments.
Average unit prices (AUPs) declined 3% to $1,938 from $2,003 reported for the fourth quarter of 1998. AUPs declined 14% from $2,253 in the first quarter of last year.
Finally, Gateway Country( stores expanded to 154 stores in the US. with the addition of 10 new stores in the first quarter.
"From a top-line perspective, the first quarter was one of our best ever," said Jeff Weitzen, President and Chief Operating Officer, "We're connecting everywhere, all around the world. Whether it's on the Web or up and down the street, we're demonstrating time and again that we've built an unparalleled ability to respond to peoples' technology needs in a truly personalised way."
Gross Margin Levels
Pricing discipline focused vendor management, healthy overseas margin performance, solid execution and a richer product mix, all contributed to strong overall margin performance in the quarter. Gross margins for the first quarter were 21.4 %, up from 19.5% last year and essentially flat compared to 21.6% in the fourth quarter of 1998. This represents the fifth consecutive quarter of year-over-year margin improvement for Gateway.
Selling, General & Administrative (SG&A) Expenses SG&A productivity in the first quarter was offset by continued strategic investment across a number of fronts, including systems infrastructure, the Internet, Gateway Country( stores and international expansion. SG&A spending totalled $309.7 million or 14.7 % of sales for the first quarter, compared to $227.3 million or 13.2% of sales in last year's first quarter, and down slightly in total spending from $310.6 million or 13.5% of sales in the fourth quarter of 1998.
Operating Income up 29%
Operating income for the first quarter totalled $140.8 million, up 29% from $109.2 a year ago. Other income increased 58% to $14.8 million compared to the first quarter of 1998, due to increased interest income.
Net Income increased 31%
Net income increased to $99.6 million compared to last year's first quarter level of $75.9 million, a 31% growth rate over last year. Earnings per diluted share increased 29% to $.62 from $.48 per diluted share a year ago.
Cash & Marketable Securities at $1.273 Billion Level
Cash and marketable securities ended the quarter at $1.273 billion. Net cash generated by operations in the first quarter totalled $134 million, driven by strong working capital performance. The slight decrease in cash levels from the fourth quarter is principally due to the stock buy-back program of 700,000 shares totalling $55 million, and the purchase of a 19.9% interest in NECX. Strong inventory management programs once again resulted in record highs for the company. Inventory turns were 40 compared to 26 a year ago and 40 last quarter. The cash conversion cycle remains strong at negative 3.2 days. The effective tax rate for the quarter was 36%.
Business Outlook
"Moving ahead, we're focused on maintaining our strong momentum," said John Todd, Senior Vice President and Chief Financial Officer. "We're marshalling the resources and talent needed to continue delivering consistent financial performance in the seasonally challenging second quarter and beyond."
At the beginning of the second quarter in the US, Gateway announced the launch of the Your:)Ware for Business program, an expansion of its popular Your:)WareSM consumer program, tailored for small businesses. The Your:)Ware for BusinessSM program provides customised solutions, one-to-one account management and an innovative technology refresh program for small and medium sized businesses. The new program, coupled with localised sales, service and training that the company offers through its Gateway Country( stores, promises to significantly expand Gateway's presence in the business arena.
"The small business segment is a huge, untapped opportunity for us," Weitzen said. "We still have a lot of work to do, but with our Gateway Country( stores and unmatched, personalised service, we think we're positioned better than any other player in the marketplace."
Going forward, Gateway intends to succeed by remaining on the cutting edge of technology personaliSation across all channels and segments of its business.
"There's no denying that the PC business continues to be very competitive, and not just on pricing," Waitt said. "But, as we've demonstrated in the first quarter, our unique route to market is built to succeed in this environment. More importantly, we intend to continue leading the industry in delivering technology that's custom-fit to our clients' needs."
Annual Meeting
The 1999 Annual Meeting of shareholders of Gateway will be held on May 20, 1999, at the Sioux City Convention Center, 801 Fourth Street, Sioux City, Iowa, at 9:00 a.m. local time. The meeting will also be broadcast on Gateway's Web site, www.gateway.com/annualmeeting.
Special Note
The above statements include forward-looking statements based on current management expectations. Factors that could cause future results to differ from these expectations include the following: general economic conditions; growth in the personal computer industry; competitive factors and pricing pressures; component supply shortages; risks relating to new or acquired businesses; and inventory risks due to shifts in market demand. Additional factors are described in the Company's reports filed with the Securities and Exchange Commission.
1. According to 1997 Technology User Profile from ZD Intelligence, announced in the spring of 1998, 75% of Gateway clients who bought a new computer in 1997 repurchased a Gateway system. 2. According to Gartner Group/Dataquest US PC Quarterly statistics.
About Gateway
Gateway (NYSE: GTW), a Fortune 500 company founded in 1985, is a leading global direct marketer of PC products. The company has manufacturing facilities in the United States, Ireland and Malaysia and employs more than 19,000 people worldwide. Gateway products and services consistently win top awards from leading industry publications. Revenue for the year 1998 was $7.5 billion. For further information, visit Gateway at gateway.com.
About Gateway Europe, Middle East & Africa
GATEWAY began its European operations in 1993 when it opened its manufacturing plant and European, Middle East and Africa headquarters in Dublin, Ireland. Today, the company is firmly established throughout Europe and sells into Austria, Belgium, France, Germany, Luxembourg, Ireland, the Netherlands, Sweden, Switzerland, the UK, Middle East and Africa. For further information, visit the GATEWAY website at gateway.com.
For further client information, please contact:
Gateway Europe, Clonshaugh Industrial Estate, Dublin 17, Ireland - 0800 55 2000 - www.gateway.com/uk
Gateway, the stylised Gateway logo, Gateway Country and Your:)Ware and Your:)Ware for Business are trademarks or registered trademarks of Gateway 2000, Inc.
CONTACT: Amanda Fenner Tel: +44 (0)181 242 4103 e-mail: amandaf@text100.co.uk Phillipa Cook Tel: +44 (0)181 242 4128 e-mail: phillipac@text100.co.uk
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