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Gateway Swings to Net; PC Sales Up

The computer maker reiterates its full-year forecast but says it won't give guidance in 2006.
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Gateway

(GTW)

, bolstered by a 25% jump in computer unit sales, swung to a third-quarter profit from a year-earlier loss that was weighed down by charges.

Gateway also backed its earnings expectation for the year but said it won't provide guidance for 2006.

The PC and electronics maker reported third-quarter earnings of $15.1 million, or 4 cents a share, including a $1 million net gain from one-time items. Analysts surveyed by Thomson First Call had predicted earnings of 3 cents a share. In last year's third quarter, Gateway posted a loss of $59.3 million, or 16 cents a share, amid $63 million in charges.

Revenue rose to $1.02 billion from $915.1 million a year earlier, narrowly beating Wall Street's target of $1.01 billion. The company's PC sales rose 25% from a year earlier to 1.17 million units in the quarter, growth Gateway attributed to market-share gains in its U.S. retail business.

The computer growth offset declines in sales of Gateway's non-PC products. The company said revenue from items such as software, peripherals, services and accessories was flat from the second quarter and down 8% from last year.

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Gateway also continued to grapple with margin pressure. The company, which

cut its full-year outlook in August amid margin pressures stemming from price-driven competition, said gross margin for the third quarter was 8.3%. The company's gross margin stood at 10% in the prior quarter and 10.1% last year.

"The sequential and year-over-year declines are primarily due to strong growth in Retail, which has lower margins, and continued competitive pressures in Professional, and, to a lesser extent, Retail," Gateway said in a press release.

Gateway said it is comfortable with its August earnings forecast for revenue of $3.9 billion to $4 billion and earnings of 11 cents to 13 cents a share under generally accepted accounting principles. The company's guidance had called for non-GAAP earnings of 13 cents to 15 cents a share; analysts predict earnings of 13 cents a share on this basis.

The 2005 guidance could be the last full-year projection the company provides for a while. Gateway said that for 2006 it won't give specific annual revenue and earnings forecasts.

"The company believes that the downside of providing such guidance significantly outweighs any benefit to shareholders in the present regulatory environment," the company said. "Gateway will consider publishing financial milestones to allow shareholders to track our progress."

Gateway shares closed Thursday at $2.57, down 10 cents, or 3.8%.