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Gateway meets 1Q forecast
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April 13, 2000: 7:54 p.m. ET
Consumer, overseas demand counters sluggish corporate, government sales
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NEW YORK (CNNfn) - Gateway reported a 37-percent jump in first-quarter profit Thursday, as strong consumer and overseas demand, overseas sales and increased subscribers to its Internet service offset weakness in sales to businesses.
During the three months ended March 31, Gateway (GTW: Research, Estimates), the No. 2 direct seller of personal computers, earned $136 million, or 41 cents per diluted share, matching the consensus estimate of analysts polled by earnings tracker First Call. In the year-ago quarter, Gateway reported a profit of $99.6 million, or 31 cents per share.
Meanwhile, revenue for the quarter came in at $2.34 billion, up 11 percent from the corresponding period a year ago. Early in the quarter, Gateway executives had told analysts to expect first-quarter sales to be roughly $2.45 billion.
The shortfall came primarily from weaker than expected sales to business and government customers, Jeff Weitzen, Gateway's chief executive, told analysts in a conference call Thursday evening.
PC buying patterns were thrown out of kilter late last year and into the first quarter of this year, primarily by corporate and government customers, who, fearing the potential impact of the "Y2K problem" on their systems, deferred technology spending until the millennium changeover.
Though Y2K -- which many thought would render computer systems inoperable because they would not be able to distinguish the year 2000 from 1900 - turned out largely to be a non-event, demand did not pick up as quickly as expected, according to Weitzen.
"Soft demand lingered a lot longer than any of us in the business expected," he said.
During the first quarter, Gateway posted better than 25 percent revenue growth in its consumer and overseas units, while revenues from its business unit declined 19 percent.
However, January was the low point for Gateway's business sales, and executives expect that unit to gain momentum moving in the current quarter.
"With solid execution moving ahead, I can't think of any reason that we shouldn't be back on track," Weitzen said.
Gateway will particularly sharpen its focus on the small business sector, and the second and third quarters are typically the peak quarters for education and government sales, according to Weitzen.
Gateway shares fell sharply in New York Stock Exchange trade ahead of the earnings release, ending the session down 3-1/4 at 52, a 5.9 percent decline on the day.
Gateway's non-PC, or "beyond-the-box" revenue - which include Internet services, financing and training that the company sells along with its computer systems - also was strong during the quarter. Non-PC income exceeded 25 percent of overall income in the first quarter, executives said.
A surge in subscriptions to the Internet service Gateway is providing with America Online (AOL: Research, Estimates) played a big part in that increase. An additional 300,000 subscribers signed up for the service in the first quarter, executives said.
Earlier this year, Time-Warner, CNNfn's parent company, agreed to be acquired by America Online.
Looking ahead, Gateway expects an 8 to 9 percent sequential decline in revenue during the second quarter, although it is on track to meet Wall Street's expectations for second-quarter earnings of 36 cents per share, and
full-year earnings of $1.83, according to Gateway chief financial officer John Todd.
"We expect to deliver and meet revenue and earnings expectations for the year," Todd said. 
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