Gateway Posts Rise in 3Q Profits

Monday, October 16th 2000, 12:00 am

By: News On 6

SAN DIEGO (AP) — Avoiding the slump facing some rivals, computer maker Gateway Inc. said Thursday that its third-quarter profits jumped 35 percent over last year.

In the three months ended Sept. 30, Gateway, known for quirky ads and faux cowhide boxes, earned $152.6 million, or 46 cents per share, compared with a profit of $113.2 million, or 35 cents per share, in the year-ago quarter.

Sales rose 16 percent to $2.53 billion from $2.18 billion.

The results met the consensus estimate of analysts surveyed by First Call/Thomson Financial.

Gateway's profits stand out amid recent bad news from industry stalwarts. Intel, Dell Computer Corp. and Apple Computer have seen their stock prices tumble in recent weeks after warning that quarterly revenues would be below expectations.

San Diego-based Gateway has avoided the difficulty because of its increasing stream of revenue from sources other than the sale of personal computers, including Internet services and software, John Todd, the company's chief financial officer, said in an interview.

``This is a great validation of us having a different strategy, a different model,'' Todd said.

The company now derives half its total profits from these non-PC sources — which also include training for customers, revenue from financing and the sale of warranties. A year ago, Gateway earned just 20 percent of its profit from these ``beyond the box'' sales, Todd said.

In time for Christmas, Gateway, in partnership with America Online Inc., plans to begin selling a so-called Internet appliance that will be cheaper than a personal computer, but offer Web access from a kitchen counter.

The need for a more diverse strategy emerged as the price of the personal computer fell, below $1,000 in many cases, and growth has slowed in the U.S. and European markets.

Dell, for example, said Oct. 5 that its third-quarter revenues will fall 3 percent short of Wall Street projections because of sluggish sales in Europe and among small-business customers.

Gateway's non-PC products, which it sells directly at its 384 Gateway Country stores worldwide and also through 294 outlets in U.S. OfficeMax outlets, tend to be high-margin and, in the case of Internet service and financing revenue, recurring, said Charlie Wolf, an analyst with UBS Warburg.

``The company has become increasingly immune to the vagaries of the PC market,'' Wolf said.

Analysts are split on the non-PC Internet appliances, which some see as an unproven market.

But the devices, which will become increasingly sleek as new technologies emerge, could be useful to the nearly 50 percent of American homes without a personal computer and Internet access, said James Waggoner of Sands Brothers & Co. in New York.

``I think there's a lot of room still out there in the consumer market,'' Waggoner said.

Gateway reported its results after the close of regular trading. Shares of Gateway ended the session down 99 cents at $43.63 on the New York Stock Exchange.


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