Sales Disappoint at Gateway

The computer maker comes up short in the fourth quarter.
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Updated from 5:48 p.m. EST

Gateway

(GTW)

on Thursday posted weaker-than-expected fourth-quarter results, as sales to corporations and from its direct sales division plummeted.

Investors sent shares down 7.9%, or 22 cents, to $2.56 in recent after-hours trading.

Revenue at the Irvine, Calif., computer maker was $1.12 billion in the three months ending Dec. 31, 2005. The results were below Wall Street expectations, as well as the company's own guidance, which called for a sales range between $1.17 billion and $1.27 billion.

On a GAAP basis the computer maker earned 6 cents a share for the quarter, which compares with 4 cents, excluding items. On that basis, analysts polled by Thomson First Call were looking for 5 cents a share on sales of $1.22 billion.

Gross margin for the fourth quarter was 7.7%, compared with 8.8% in the year-ago period, as average PC prices in the professional segment eroded. And a component shortage left the company unable to fully meet demand in the retail channel.

Retail sales were the brightest spot in an otherwise grim quarter for the computer maker. Gateway's retail sales jumped 31% year over year, to $792 million.

The picture was reversed at the company's other two major divisions, however. Direct sales through Gateway's online and phone-order business were $115 million in the quarter, down 39% year over year, as marketing expenditures failed to drive sales.

The professional segment, where Gateway believes its biggest growth opportunity lies, had $217 million in fourth-quarter revenue, down 9% year over year. The company blamed the shortfall on lower unit sales and declining average unit prices.

In a conference call after the earnings release, CEO Wayne Inouye said the professional PC business was proving tougher than expected. Despite the intense competition and pricing pressure in the professional market, Inouye said Gateway was "married" to its professional sales strategy and would develop its infrastructure and improve its catalog of products and services.

A new PC final-assembly facility, slated to be operational by midyear, should also give Gateway an edge in professional sales by reducing costs.

Inouye took the helm of Gateway in 2004, when the company merged with

eMachines

, where he had served as CEO. Since then, he has shuttered Gateway's line of branded retail stores, eliminated Gateway's line of consumer-electronics products and sharpened the company's focus on sales to business, government and educational institutions.

But the company faces tough competition in the professional PC market from

Dell

(DELL) - Get Report

and

Hewlett-Packard

(HPQ) - Get Report

, both of which have strong brands in the business world and much deeper pockets than Gateway. Meanwhile,

Lenovo

and

Acer

are putting pressure on Gateway's consumer retail sales, according to some analysts.

For the 2005 year Gateway had sales of $3.85 billion and a net profit of $49.5 million, or 13 cents a share. In August, Gateway cut its full-year outlook of $4 billion to $4.25 billion to a range of $3.9 million to $4 billion.

Inouye said the company accomplished some important objectives in 2005, including generating its first full year of GAAP profits since 2000 and rebuilding confidence in Gateway's viability.

But he said the company still had a lot of work to do as it pushes toward achieving its long-term growth strategy.

"We know we still have a lot of work left to do," said Inouye. "Turnarounds take time and a great deal of effort."

The company did not provide any guidance for the current quarter of the 2006 year.