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Gateway Swings to Profit

Revenue falls from a year earlier.

Updated from 5:42 p.m. EST



swung to a profit in the fourth quarter, despite slumping PC sales.

Sales in the three months ended Dec. 31 totaled $1.02 billion, in line with analysts' expectations and down from $1.12 billion at the same time last year.

Net income was $8.8 million, or 2 cents a share, vs. a loss of $20.9 million, or 5 cents a share, a year ago.

The company said it had a $11.8 million net tax benefit in its fourth quarter.

Gateway's gross margin in the fourth quarter was 5.2%, down from 7.6% in the third quarter and 6.2% a year ago.

"Certain supply constraints and the resulting impact on our supply chain contributed to lower than expected gross margins," said CEO Ed Coleman in a statement.

The company did not provide guidance for the current quarter.

Shares of Gateway were recently off 10 cents, or 4.7%, to $2.05 in after-hours trading.

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The company did not provide a balance sheet for the full year 2006, citing recently identified "inventory receipt discrepancies which may result in balance sheet adjustments to inventory and liability related accounts."

Gateway said it is evaluating the effectiveness of its internal controls relating to the matter, and said it would provide full 2006 results with its 10-K filing later this month.

In the fourth quarter, Gateway sold 1.28 million PCs, down 5% from the same time a year ago. Shipments were down year over year in all three of Gateway's businesses: retail, professional and direct sales.

Gateway said its retail performance was crimped by the component shortages and by retailers delaying PC purchases in the period before


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released its new Vista operating system.

"Our channel inventories closed the quarter at unusually low levels as retailers managed down their inventories of Microsoft XP products in anticipation of the January 2007 launch of Microsoft Vista," Gateway said.

But the company couldn't blame all its problems on Vista.

Sales plunged 16% year over year at Gateway's professional group, due to "increased competition within the segment and greater selectivity in contract bidding."

Headcount reductions in the professional group helped Gateway improve the gross margin, although the business still lost $4.2 million.

The only bright spot was in Gateway's business selling PCs over the phone and the Web: Sales plunged 31% year over year, but gross margin bounced back to 25.3% after dipping to 16.8% in the third quarter.