April 27, 2006 2:41 PM PDT

Legal costs lead to Gateway loss

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Gateway reported a sharp increase in quarterly revenue and PC sales on the strength of its retail business, but continued problems in its professional group and legal costs led it to a net loss for the first quarter.

Revenue was $1.08 billion, up from revenue of $838 million in last year's first quarter. Gateway's net loss was $12.3 million, or 3 cents per share, compared with last year's first-quarter loss of $5.2 million, or one cent per share.

"In the first quarter, our retail business unit, which also includes our international sales, continued to perform very well in terms of both sales and margin," Rick Snyder, Gateway chairman and interim chief executive officer, said in a press release announcing Gateway's results. "Unfortunately, our positive retail results were partially offset by losses in our professional sales unit. As a result, we essentially broke even in the quarter, prior to litigation expenses of $14 million."

Gateway in March settled its legal dispute with Hewlett-Packard over allegations of patent infringement. Gateway paid HP $47 million as part of that settlement, it said at the time.

Problems in Gateway's professional and direct divisions led to the departure of former CEO Wayne Inouye in February. Gateway increased its sales to professional customers in the first quarter but endured a decrease in revenue as the result of competitive pressures, it said.

Things were worse for the direct business, which saw a 23 percent decrease in units and a 27 percent decrease in revenue compared to last year's first quarter.

Gateway's retail sales are keeping it afloat. Retail shipments increased 62 percent compared to last year, helping the company increase its overall shipments by 47 percent.

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