Y2K problems hurt Gateways profits

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By Scott Hillis Reuters Thursday, January 20, 2000; 5:53 PM

LOS ANGELES -- Gateway Inc., the No. 2 direct seller of personal computers, Thursday posted lower fourth quarter profits, citing supply problems and an unexpected business sales slowdown stemming from the year 2000 problem.

Gateway, which built its success through its direct sales approach and quirky black-and-white cow image, said net earnings for the three months ended Dec. 31 were $126 million, or 38 cents a share, compared with $129 million, or 40 cents a share, a year earlier.

The company warned earlier this month that profits would be around 37 cents a share, about 7 cents short of Wall Street's expectations, citing "spotty and unreliable" supplies of microprocessers and motherboards, the brains and guts of PCs.

Excluding expenses of $26 million, or 5 cents a share, that it recorded for a partnership with Internet access provider America Online Inc., and a benefit from a change in the tax rate, Gateway recorded income of $139.3 million, or 42 cents per share.

"Fourth quarter results were negatively affected by supply issues and an unexpected slowdown in business-to-business sales due to Y2K concerns among large businesses and government and education institutions," Gateway said.

Gateway had only used processors made by chip giant Intel Corp. but shortly after its earnings warning, it said it would start using processors from Intel rival Advanced Micro Devices Inc..

Gateway Chief Financial Officer John Todd said in an interview the first quarter of fiscal 2000 had started off well and the company expected to meet Wall Street forecasts of 41 cents for the period.

"We are off to a good start. On the business side, we are saying we're starting off soft and ramping up," Todd said.

In the fourth quarter, computer shipments rose 18.3 percent to 1.36 million units, while gross margins increased to 22.3 percent from 21.6 percent.

"We promised to bring a new level of discipline and focus to our margin management," Todd said in a statement. "In the face of aggressive competition from low-priced entrants across all segments of our business, we have continued to deliver on the promise quarter after quarter."

Gateway also said it had signed up more than 400,000 people to its joint Internet access service with AOL in the fourth quarter. Total subscribers to the service numbered more than 1 million, it said.

Income from non-computer sales such as that from Internet service, software sales, financing and peripheral sales, accounted for more than 20 percent of total income, beating expectations, it said.

"Our overall performance in 1999 was strong and the progress we made against our beyond-the-box strategy positions us very well to meet our objective of delivering consistent results in 2000 and beyond," Chief Executive Jeff Weitzen said in a statement

http://www.washingtonpost.com/wp-dyn/business/A7808-2000Jan20.html

-- Martin Thompson (mthom1927@aol.com), January 20, 2000


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