Boring Portfolio

<THE BORING PORTFOLIO>
Bore Cos. Report
Gateway Up First

By Dale Wettlaufer (TMF Ralegh)

ALEXANDRIA, VA (July 23, 1999) -- Two Boring companies -- American Power Conversion and Gateway (NYSE: GTW) -- reported second quarter results after the bell last night. I'll get to APC next week, but it's steady as she goes there. Below is a summary of the first part of Gateway's conference call. On Monday, I'll finish that up and move on to APC. Have a good weekend.

Gateway Q2 1999 release

  • Grew twice as fast as overall PC market.
  • 34th consecutive quarter of market share growth
  • 46% unit growth in consumer market.
  • Sales to business customers a company record
  • Strong international growth
  • Business accelerated as quarter progressed

  • Record gross margin at 22%
  • Reduced SG&A sequentially
  • Continued executing on diversification strategy. Generated more than 10% of income "delivering solutions to our customers." Gateway.net more than doubled subs to over 400,000 to become the fastest-growing ISP in marketplace.
  • Q2 has been historically the toughest quarter of the year.

Three key focuses for quarter's financial strategy:

1. Drive corporate business. The second quarter is a strong corporate and education quarter. "We had record sales and continued acceleration in unit growth" in our corporate business.

2. Maximize profits in consumer business in what has historically been a seasonally slow period for Gateway. The strategy there was to go fishing when the fish were biting. That means the company would scale back marketing and competitive pricing in April and May -- when consumers are less active and returns on operating expenditures are lower -- and focus more on margins and profit dollars during those periods. In June, when the fish are biting, the company was aggressive on pricing and really focused on maximizing units. The company had a "tremendous June" almost equal in results to December, which is usually the best month of the year for Gateway. The net of all this was consumer unit growth of 46%.

3. Driving non-PC revenues and income. This includes the ISP business, the warranty business, software, finance, and the add-ons business. The results of this focus were record non-PC revenues and net income, which allowed the company to offset the normal average unit price (AUP) decline and achieve record gross margins.

The net of these three key focuses were 36% unit growth, 18% sales growth, and 47% EPS growth.

Orders grew 40%, with backlog growing by 40,000 units over Q1. This backlog was driven by the back-end loaded nature of both the quarter and the month of June. There were no shortages or specific issues relating to the backlog.

Consumer units grew 46% and consumer revenues grew 25%. The consumer business grew across all three channels. From a stores channel perspective, store count grew to 168 and same-store sales grew. Direct sales from the Web accounted for 8% of revenues, up from 6% in Q1 and 3% in Q498. Gateway continues to be able to move people onto the Web, which is important, as this is the company's most efficient channel.

As discussed last quarter, Gateway is going to become more aggressive in the sub-$1,000 market. Over 15% of consumer units were sold in the sub-$1,000 market in Q2. The company found through consumer testing that sub-$1,000 units are neutral on margins and can result in increased sales per customer due to add-on sales for customers looking for performance units.

One of the keys to continuing aggressiveness and profitability in sub-$1,000 is the company's ability to drive non-PC revenues. In the second quarter, the company set a record in non-PC revenues. Non-PC AUP exceeded $200 per system, the first time in the company's history in consumer PCs. This is important because these sales are both margin-accretive and they also offset declines in AUPs.

Corporate sales set a record with $878 million in revenues. Unit sales increased 30% and sales advanced 12%. Corporate unit sales continued to accelerate, with Q1 growth at 23% and Q498 at 20%. This shows that corporate sales are gaining traction and will play a major role in growth for the balance of the year. Gateway continued to take share in small and medium business and education segments this quarter. Small and medium business grew units at 33% and education grew units at 31%. Gateway continued to leverage its Country Stores to increase gains in business sales.

($ in millions, Motley Fool estimates)

Q1 end invested capital...$489.24
cash & equiv...$1,328.47
required cash...$345.59

Q2 end invested capital...$770.65
cash & equiv...$1,228.32
required cash...$382.42
Q2 avg. inv capital...$629.95
NOPAT...$78.67
ROIC...49.95%

Ending
DSO...27.91
DSI...7.43
Days in Payables...43.53
Cash conversion cycle...-8.19

Average cash conversion cycle
DSO...27.29
DSI...8.86
Days in Payables...43.74
Cash conversion cycle...-7.60


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07/23/99 Close
Stock Change   Bid
APCC  +  1/16  21.31
BRKb  -18      2215.00
CSL   -  1/8   48.63
GTW   +10      73.00


                  Day     Month   Year  History
        BORING   +1.11%   2.63%   6.63%  43.17%
        S&P:     -0.30%  -1.15%  10.97% 126.15%
        NASDAQ:  +0.30%   0.25%  22.79% 158.65%

    Rec'd   #  Security     In At       Now    Change
  8/13/96  200 Carlisle C    26.32     48.63    84.71%
  4/20/99  460 American P    14.48     21.31    47.22%
   2/9/99  100 Gateway 20    72.38     73.00     0.86%
 12/31/98   12 Berkshire   2276.17   2215.00    -2.69%


    Rec'd   #  Security     In At     Value    Change
  8/13/96  200 Carlisle C  5264.99   9725.00  $4460.01
  4/20/99  460 American P  6659.25   9803.75  $3144.50
   2/9/99  100 Gateway 20  7237.50   7300.00    $62.50
 12/31/98   12 Berkshire  27314.00  26580.00  -$734.00


                             CASH  $18177.16
                            TOTAL  $71585.91


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