'Beyond the Box' Approach Lifts Gateway to Earnings Expectations

Updated from 5:02 p.m. ET

Gateway (GTW) reported third-quarter earnings in line with Wall Street's estimates after the close of regular trading Thursday.

Gateway said it earned $152.6 million, or 46 cents a share. That figure is up from the 35 cents a share the company earned in the year-ago period, and matches the expectations of the 20 analysts polled by First Call/Thomson Financial. The company reported revenue of $2.53 billion, generally in line with analysts' expectations.

Warnings of slowing sales from Intel (INTC), Dell (DELL) and Apple (AAPL) have sent PC stocks sharply lower in recent weeks. But Gateway's focus on the consumer seems to have allowed it to escape the weakness in the corporate and education markets. Sales of PCs to consumers increased 27% from last year.

Business sales grew 2% from the previous year -- not exactly an eye-popping rate, but a marked improvement from the 10% decline the company posted in that segment in the second quarter.

The segment Gateway refers to as "beyond the box" -- it includes things like service charges on the company's Internet access, computer training software, financing charges and sales of peripherals -- contributed to more than 50% of earnings, 5 percentage points better than the goal Gateway had set earlier this year.

On the company's conference call, Banc of America Securities analyst Kurt King asked CFO John Todd if the rapid growth of high-margin services revenue relative to PCs might mean that one day the company's earnings will have no dependence on what it charges for hardware, which functions as a platform from which to sell services. (Banc of America hasn't done underwriting for Gateway.)

"That's a fairly good way of putting it," Todd said. "We can see a day when we'll make the lion's share or even all of our money from beyond the box."

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