As the company previously announced, a drop in demand impacted revenue for the quarter across all customer segments in the weeks following the events of September 11, and the company had a larger than expected operating loss associated with the withdrawal from its company-owned international operations.
While the already challenging market environment was compounded by the recent tragic events, we maintained our focus and made significant strides to align our business with our new strategy, said Ted Waitt, Gateway chairman and CEO.
In late August we began a significant restructuring of our business, which included alignment of our sales, service and manufacturing operations. We’ve made a number of tough decisions and we’re now focused on execution, continued Waitt. We’ve radically simplified our desktop product line and are meeting our sales mix goals on these recommended product configurations. Customer satisfaction continues to remain high, and our aggressive marketing and advertising activities in the quarter positioned us to take the lead in delivering Microsoft Windows XP to our customers.
Unit sales in the United States increased to 818,000, compared to 798,000 for the prior quarter. Unit volume for key segments were tracking to more favorable growth rates prior to September 11. In the weeks following the tragedy, the company experienced a drop in demand; however, since then, demand has significantly rebounded from those levels.
Based on market projections, Gateway gained domestic share sequentially in the third quarter in its consumer and education segments by increasing unit sales 13 percent and nine percent, respectively. Unit sales to small and medium business customers declined three percent over the previous quarter; however they showed an increase of nine percent over the prior year.
Gateway’s worldwide unit sales decreased three percent to 896,000 over the prior quarter, affected in part by the previously announced closure of the company’s international operations during the quarter.
Sales of non-PC products and services were 17 percent of revenue and 43 percent of gross margin for the quarter, with $140 million of revenue recorded at the point of sale and $102 million recorded after the sale. Gateway’s average selling price (ASP), which is the sum of PC and non-PC products and services sold at the point of sale, was $1,460 for the quarter, compared to $1,501 in the second quarter.
During the quarter Gateway took a leading position in offering Microsoft Windows XP. The company was first to market and ship systems pre-installed with the new operating system, and the first to offer training courses to show customers how to take full advantage of Windows XP.
The company’s gross margin for the quarter, excluding special charges, was 16.8 percent, compared to 18.7 percent in the previous quarter. Factors impacting this gross margin include, among other things, a conscious decision to accelerate the sale of international inventory, product line transition costs, as well as additional costs associated with the consolidation and closure of three manufacturing facilities.
Gateway’s selling general and administrative (SG&A) expenses were $330 million, excluding special charges, compared to $309 million for the previous quarter. After achieving sequential declines in the amount of SG&A, excluding special charges, for two consecutive quarters, the company experienced incremental costs resulting from, in part, the implementation of its restructuring plans in the third quarter. These incremental costs are not expected to recur.
Cost structure issues have been addressed by the organizational and structural changes announced on August 28. It is estimated that these changes will save the company approximately $300 million in costs and expenses annually. Historically SG&A expenses increase sequentially in the fourth quarter. However, due in part to these changes, the company expects SG&A to decline sequentially in the fourth quarter as it begins to realize the benefits of these changes and continues to take the necessary steps to reach sustainable levels of SG&A.
The company took special charges in the quarter of $571 million as compared to estimates of up to $605 million for previously announced decisions, which included, among other things, the exit of company-owned international operations, the alignment and closure of call centers and manufacturing operations, as well as the impairment of value of a number of the company’s investments.
