Gateway Bulls Far From Home

The PC maker's earnings report sends shares plummeting roughly 15% after hours.
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Updated from 4:56 p.m. EDT

Gateway

(GTW)

shares tumbled almost 15% late Monday as the computer manufacturer missed Wall Street's second-quarter sales targets and reduced its full-year financial goals because of margin pressures stemming from price-driven competition.

Shares dropped 49 cents to $3.40 in recent after-hours trading Monday after closing the regular session up 8 cents to $3.89.

For the quarter ended June 30, Gateway reported net income of $17.2 million, or 5 cents a share, on sales of $873 million. During the same quarter last year, the company lost $339 million, or 91 cents a share, on sales of $838 million.

Excluding restructuring charges, Gateway earned 3 cents a share. Also, Gateway said $25 million worth of product that was supposed to be received by customers by the quarter's close was still in transit and so could not be counted in the final revenue figure.

Analysts expected earnings excluding charges of 2 cents a share and sales of $907 million, on average, according to Thomson First Call.

Gateway announced its results late Monday after twice delaying them from an originally scheduled late-July release because of accounting issues surrounding a $150 million legal settlement with

Microsoft

(MSFT) - Get Report

that was announced in April. Gateway said its operating expenses included $15.1 million in benefits from this settlement.

Leading up to Monday, the reporting delays didn't stop investors from picking up shares. Gateway stock hit a two-year low of $2.85 in mid-May and then ran up to $4.08 on Aug. 3, helped by a

couple of major sales wins. The latest selloff, though, erased all of July's rally.

At the quarter's start, Gateway reiterated full-year financial targets for earnings between 17 and 19 cents a share and sales between $4 billion and $4.25 billion. Those targets have now been reduced to earnings between 13 cents and 15 cents a share on sales between $3.9 billion and $4 billion.

The company cited "gross margin pressure in all our major business units" stemming from "competitive pressures."

PC shipments improved 7% sequentially to 1 million units with Gateway claiming market share gains. Non-PC sales, which includes software, peripherals, services and consumer-electronics gear, rose 6% sequentially.

Overall gross margin was 10% vs. 9.6% in the previous quarter and 1.9% in the same quarter last year. The non-PC side of Gateway accounted for 73% of the company's profitability.

Expenses dropped to $85 million vs. $88 million in the previous quarter and $354 million in the same quarter last year.

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