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Gateway, Inc (GTW)

Q1 2007 Earnings Call

May 8, 2007 5:30 p.m. ET

Executives

Marlys Johnson - IR

Ed Coleman - CEO

John Goldsberry - SVP and CFO

Analysts

Andrew Neff - Bear Stearns

David Bailey - Goldman Sachs

Matt Kather - WR Hambrecht

Richard Gardner - Citigroup

Bill Fearnley - FTN Midwest

Jean Orr - Nutmeg Securities

Presentation

Operator

I would like to welcome everyone to the Gateway first quarter Earnings Call. Your lines have been placed on mute. There will be a question-and-answer session at the end of the speakers' remarks.

I would like to turn it over to Marlys Johnson with Gateway Investor Relations. Good afternoon, Ms. Johnson.

Marlys Johnson

Good afternoon, Lamont, and thank you. Good afternoon, everyone. Welcome to Gateway's first quarter earnings conference call.

If you have not seen a copy of today's earnings release, please go to the News and Information pages on our gateway.com Web site. Additionally, we have added slides to our presentation today. They can be viewed by clicking on the link on our home page.

Joining me today are Chief Executive Officer, Ed Coleman and Senior Vice President and Chief Financial Officer, John Goldsberry.

Before we begin I'd like to remind the audience that the presentations you are about to hear contain forward-looking statements based on current management's expectations that involve risks and uncertainties as well as assumptions that if they do not materialize or prove incorrect could cause Gateway's results to differ materially from those expectations.

All statements other than statements of historical fact are statements that could be forward-looking statements. Information about factors that could cause future results to differ from these expectations can be found in today's earnings press release and the Company's reports that are filed with the Securities and Exchange Commission.

During this call we may discuss certain non-GAAP financial measures that management uses as a basis to evaluate the Company's financial performance and forecast future periods. If applicable, you can find additional information on these non-GAAP measures and a reconciliation of these non-GAAP measures to quarterly reports on our Web site.

I would now like to turn the meeting over to John Goldsberry who will review Gateway's first quarter financial results, who will be followed by Ed Coleman who will provide overall commentary on the Company's future direction and priorities. Thereafter, as time allows, we will have questions from the audience. To allow greater participation, please limit your questions to one per person. John?

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John Goldsberry

Thank you, Marlys. Let me summarize our financial results by saying we had a mixed quarter. On the one hand, we exceeded our budgeted revenues and we achieved market share gains. We also continued to make progress on our expenses with SG&A dropping to 6.5% of revenue down from 9.6% a year ago.

However, despite sequential margin improvements in our Retail and Professional segments, the business continued to generate unacceptably low margins overall. The net result is we had an operating loss of $6.7 million versus a loss of 4.1 in Q4 and a loss of $15.7 million a year ago. We reported net loss of $8.6 million, or $0.02 a share.

Let me walk through our quarterly financial results. Q1 revenue came in at just over $1 billion. This was down 1% from Q4 due to a 14% sequential decrease in Professional revenue.

Retail grew 2% quarter-over-quarter despite seasonal trends. U.S. channel inventories for Retail remained tight at under four weeks.

Direct grew 2% also quarter-over-quarter with units growing 16% sequentially. Revenue overall was down 6% year-over-year with significant declines in Professional and Direct while Retail was essentially flat.

On the gross margin front, overall gross margin came in at $49.7 million in Q1, which was down 6% from $52.7 million in Q4 and down 37% from last year. Overall gross margin decreased to 4.9% from 5.2 in Q4 and 7.3 last year.

Looking at the segments, Retail margins did improve this quarter to 3.1% of revenue, up sequentially from 2.9, primarily due to brand and mix changes. The Retail segment contributed $19.0 million after expenses of $4.6 million, which was up sequentially from $17.1 million last quarter after expenses of $5.0 million.

Competitive pressures, component cost increases, and other operational issues that increased expedited freight and refurb costs continued to depress Retail margins below our targeted levels in Q1. The good news, however, is that these factors are mitigating, which should improve our Retail margins going forward.

Professional margins improved to 6.9% from 5.1 in the fourth quarter. The improvement in gross margin was due to better margin management in the BU.

Pro segment expenses increased to $13.8 million from $13.3 million in Q4, largely due to increased marketing expenses. The net result is that the Pro segment contributed a loss of $3 million up from a loss of $4.2 million in the prior quarter.

Looking forward, seasonal trends in our education business should cause Pro revenue to increase in Q2 and this should help margins as revenue increases relative to service costs that are largely tied to our installed base.

Direct margins declined significantly to 17.7% down from 25.3 in the prior quarter. The sequential decrease in gross margin reflects the impact of declining deferred expended warranty revenue and Internet access subscription revenue that goes back to the Gateway Country stores that we closed.

Direct expenses increased to $6.6 million from $5.2 million in Q4. The net result is that the Direct segment contribution fell to $8.7 million from $16.2 million in Q4. Direct segment contribution will continue to decline due to the declining deferred extended warranty revenue and Internet access subscription revenue share.

On the SG&A front, SG&A expense for Q1 was $65 million, or 6.5% of revenue, essentially flat from Q4 and down from over $100 million a year ago. The year-over-year decline is due to continued focus on expense controls and operational efficiencies. Q1 of last year, it should be noted, was impacted by a $14 million litigation settlement.

Looking at operating income, the net result that we achieved was an operating loss of $6.7 million in Q1. This compares to a loss of $4.1 million in Q4 and a loss of $15.7 last year.

After factoring in other items, the Company reported a net loss of $8.6 million, or $0.02 per share. This compares with net income of $11.5 million in the prior quarter and a net loss of $12.3 million a year ago. Q4 net income included a tax benefit of $14.5 million.

Turning to the balance sheet, working capital at the end of the quarter was $228 million prior to an adjustment for FIN 48, which I'll describe later. This was up from, I'm sorry, this was down from $232 million at the end of last year.

Our working capital has remained remarkably stable over the past four quarters. Invoicing and payment delays associated with our new ERP system did, however, cause certain of our working capital accounts to increase short-term.

Accounts receivable increased slightly to 27 days versus 25 days at the end of the year. Inventory closed at 12 days, up from nine days at the end of the year.

The more significant change, however, was accounts payable and supplier receivables increased to 81 days and 45 days respectively, up from 58 days and 23 days at the end of the year, again, largely due to invoicing delays associated with our new ERP system.

I guess the other thing that's worth noting is during the quarter Gateway did adopt FIN 48, which has to do with taxes, the accounting for taxes, and this did result in a reclass of $86 million of tax reserves from current to long-term liabilities, which had the affect of increasing our working capital to $314 million.

Cash and marketable securities decreased to $317 million from $416 million at the end of the year. This drop resulted from a number of things, a $28 million increase in AR, a $33 million increase in inventory, a $27 million increase in other current assets, and then a more significant $231 million increase in supplier AR that was offset by $248 million increase in ACP.

We do expect our cash to stabilize in Q2 for the following reasons. One, we expect inventory and rebates, which are in other current assets, to decrease to Q4 levels. Furthermore, supplier AR and AP have dropped very significantly between $150 million and $250 million since the end of the quarter now that the invoicing and settlement delays are behind us.

Lastly, having implemented Oracle, our capital expenditures should be lower going forward, lower than depreciation and amortization for the remainder of the year.

Let me now turn the call over to Ed, who's going to provide his update on the business.

Ed Coleman

Thanks, John, and thank you to all the investors, analysts, customers, and other members of the Gateway team that joined us today.

Over the next few minutes, I'd like to take you through my thoughts on our first quarter and offer some views on our progress. First, let me be clear. We're not satisfied with our first quarter results.

That being said, however, we accomplished much in the quarter, even as many of the challenges facing the Company remain. We narrowed operating and net losses from last year and increased U.S. market share sequentially while at the same time making significant improvements to our expense structure.

We successfully transitioned our consumer products to Vista, introduced new PC and server products, and refreshed the look and feel of much of the product look line. While these new product introductions and the implementation of a new ERP system resulted in additional costs that impacted first quarter financial performance. Our consumer business bucked seasonal trends to increase revenue sequentially. And our focus on improving profitability in our Professional business yielded sequentially a year-over-year improvement in Professional gross margin and contribution dollars.

Despite an operating loss in the quarter, there is evidence that we're making progress. Some of the strategic decisions we've made in recent months are beginning to bear fruit, so we can and must do better.

During our fourth quarter earnings call in February, I discussed a number of strategic initiatives that I believe will better enable Gateway to compete and to succeed, while at the same time provide all of our stakeholders with greater insight and transparency as it relates to our operations. As I stated then, there are four areas that we believe are key to our success: Innovative products, reduced cost structure, better operational executions, and increased focus on our consumer business.

On the product front, our award-winning line of PCs, servers, and displays continue to resonate with customers. Leading-edge products like our FX530 high-performance desktop and our full line of displays are proof that the spirit of innovation is alive and well at Gateway.

In the first quarter we launched a number of new products and transitioned to Vista as the standard operating system on all new Gateway and eMachines, consumer notebook and desktops. Our consumer desktop line was given a complete redesign and fresh look and we introduced powerful new Gateway desktops and notebooks to take advantage of the strong multimedia features inherent in Vista.

We also introduced a new Small Form Factor desktop that brings enhanced performance, manageability and flexibility to Gateway's education, government, and business customers.

Our product leadership in the government segment was recognized in March at FOSE, a the leading government technology trade show, where we won a Best of FOSE award in the Enterprise Hardware category for our rack server. Together with our number one customer satisfaction rankings from Technology Business Research for corporate desktops and notebooks, this award, along with other product accolades, confirms that we're delivering innovative products and outstanding service.

Just last week, we introduced a new 12-inch thin and light convertible tablet with much fanfare and we entered the key education and government buying season with perhaps the strongest product line in company history.

Our display line remains the strongest performer at U.S. Retail, as noted by NTV, outselling the competition in the 19, 22, and 24-inch categories. Displays are a key differentiator for Gateway in all segments and we will continue to focus on this product category in the future.

As this slide from PC Magazine shows, from a product perspective, Gateway is back. We're excited about the additional products that we'll be launching throughout the year.

Improving our cost structure in a way that makes us more competitive remains a key focus. We still believe there are opportunities to create greater efficiencies throughout our business.

While essentially flat on a sequential basis, we reduced SG&A by more than $38 million from a year ago to 6.5% of revenue, and will continue to fine-tune our expense structure in order to maximize our efficiency and create value for our shareholders.

Consistent execution continues to be another key factor that greatly impacts our overall business. I'm particularly proud of the way we rallied to make the launch of Vista a success.

While there are a great many challenges and related costs associated with such a massive undertaking, such as expedited freight charges incurred to meet some key customer deadlines, the overall process was relatively smooth and I commend the entire Gateway team and our partners for their dedication and commitment to this successful launch.

The first quarter saw the implementation of our new Oracle ERP system in support of our worldwide retail business and we've started to gain the benefits on the increased discipline this has brought to many of our processes. We expect increased efficiencies as well, as we become more adept at utilizing the tools the new system provides.

Customer service and support can be and should be a key differentiator. From a process standpoint, there are a number of encouraging things happening in this area that lead me to believe that we're making progress. As noted in the most recent Technology Business Research study, Gateway received the highest scores in parts availability, hardware availability, notebook value, and product design.

I also continue to see our North American-based tech support strategy and our best practices center as important elements of our long-term success. Our national manufacturing facility continued to ramp up in the first quarter with a further steep ramp occurring this quarter as we add desktop manufacturing for our Pro and consumer direct business.

We expect to leverage this facility further in the months ahead and see it as another way to enhance customer relationships through improved quality and increased responsiveness to changing customer demands. Further, we have targeted several critical processes in operations, forecasting, product introduction, and customer care, restructured improvement initiatives that we believe will bring significant benefits to the bottom line.

Since joining Gateway, it's been clear to me that one of our biggest strengths is the brand itself, with 96% aided awareness among consumers according to the most recent data. As I've noted previously, we're concentrating more of our resources on the consumer market.

That focus takes the form of investment in new innovative products and more frequent updates to our consumer industrial designs. It also includes an emphasis on geographic and retail partner development, improving our customer support, and utilizing our Direct channel to compliment Retail, enabling our customers to interact with us in a variety of ways, depending on their needs and preference.

While we continue to lay a foundation for growth in the first quarter, it's clear we can do much better. Operational and execution challenges remain.

We will be diligent in working to make Gateway a more consistent and predictable partner for our suppliers, customers, and investors. To that end, I believe we have a clear line of sight to the issues which impact our overall performance and are taking the steps necessary to improve our results.

With that, we'll now open the call up to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Andrew Neff with Bear Stearns. Andrew, your line is open.

Andrew Neff - Bear Stearns

Sorry, I had the mute button on. Just wanted to get a sense. You've updated us in the past about various discussions you've had with other firms. Can you give us any update on discussions you've had regarding the disposition of the company or any other discussions that are ongoing at this point?

Ed Coleman

No, we don't have anything to add there.

Andrew Neff - Bear Stearns

Does that mean that there's nothing going on or you have nothing to add?

Ed Coleman

We have nothing to say.

Andrew Neff - Bear Stearns

Are there discussions going on currently regarding sale or disposition of the firm?

Ed Coleman

We have nothing to say.

Andrew Neff - Bear Stearns

Do you have --

Operator

Your next question is from the line of David Bailey with Goldman Sachs.

David Bailey - Goldman Sachs

Yes. I just wanted to follow-up on Andy's question a little bit. If you can give a little bit more clarification about whether there are any discussions going on at all?

Ed Coleman

We made a statement several weeks ago when there were a lot of rumors out there regarding Acer and we made a statement saying that there were no discussions going on. We have nothing to add to that.

David Bailey - Goldman Sachs

Okay. Great. And then a couple other questions.

Ed Coleman

Just for the record, I don't think any public company would comment on that.

David Bailey - Goldman Sachs

Just another couple of questions. You said that your investments in your Pro business were in place at the end of '06. Can you kind of tell us what milestones we should be looking for to measure your progress there and how long will you give this business, given the year-over-year declines, before you consider further deemphasizing it or potentially even exiting this business?

Ed Coleman

I think we've been fairly straightforward about where we're headed with Pro. As I said before, we want to concentrate more of the resources of the company on the consumer marketplace. Which is where we think the brand resonates best, and where our growth opportunities, are the strongest.

Pro, we see managing that business to improve its profitability and we're aggressively doing that. The way to measure our progress in that, I think is to look at year-over-year improvements in gross margin percent and in contribution dollars.

David Bailey - Goldman Sachs

Okay. Great. And then finally, last quarter you had said that inventory in the channel was two weeks lower than normal. How does that compare with yours, under four weeks this quarter? And what's causing inventory levels to be lower than normal on a quarter-after-quarter basis?

John Goldsberry

There really ended up being not much change in channel inventory in US Retail. And in terms of what's keeping it low, I would emphasize sell-through.

David Bailey - Goldman Sachs

Okay. So this is not a change in strategy by the retailers to just keep a lower level of inventory going forward?

John Goldsberry

No. No. I mean the good news is despite having a good quarter in Retail that showed sequential increases in revenue, that didn't come from a large increase or any significant increase in channel inventories, so the good news is that bodes well for Q2.

David Bailey - Goldman Sachs

Great. Thank you.

Operator

Your next question comes from the line of Matt Kather with WR Hambrecht.

Matt Kather - WR Hambrecht

Hi, guys. Focusing in on the SG&A line, you've previously said that you've identified around 50 million to 60 million in annual potential cost savings. Could you give us an update on where you think you are at the end of March heading into Q on those cost saving programs and maybe an update on the headcount of 1700 since December end of last year? Thanks.

John Goldsberry

Okay. So as I indicated earlier, we are essentially on track in terms of achieving our expense targets and that was despite some special litigation expense that we incurred this quarter and despite increases in depreciation. We would expect expenses to continue to trend down and by the end of the year, we would expect to be operating at an SG&A as a percent of sales that was sub-6%. This quarter we were at 6.5%.

So, what I would say is we're very much tracking to the indication we'd given before and that should result in further drops in SG&A as the year unfolds.

Matt Kather - WR Hambrecht

And the headcount?

Ed Coleman

Approximately 1,600.

Matt Kather - WR Hambrecht

At the end of March? Okay. Last question, just on the SG&A, are you guys able to quantify how much the litigation or the ERP installation specifically may have had adversely on the quarter?

John Goldsberry

Yes. I think we broke that out in one of the slides, that was roughly $3 million of special litigation and Oracle contributed $1.6 million of depreciation.

Matt Kather - WR Hambrecht

Thank you.

Operator

Your next question comes from the line of Richard Gardner with Citigroup.

Richard Gardner - Citigroup

Thank you. John, in the past you've been willing to give us the percentage of revenue that came from non-PC items as well as the percentage of gross margin. Can we get that this quarter?

John Goldsberry

Sure. Okay. So non-PC percentage of revenue was 15.4, and non-PC percent of gross margin was 90%.

Richard Gardner - Citigroup

Okay. And you also mentioned I think that you expect the Internet service provider as well as the warranty portion of that to continue to decline with declines in Direct. Can you talk about how quickly you expect the non-PC portion of the business to decline?

John Goldsberry

We expect that revenue stream to continue to decline over the course of this year. In terms of trying to quantify that for you, I'm having difficulty thinking through how to do that. I guess I'd have to say, I just don't have that number offhand.

But we do -- we had budgeted that revenue stream to show declines this year versus last year and so far it's in line with expectations.

Richard Gardner - Citigroup

Okay. Maybe to ask it a different way, John, can you give us a sense of how much of the non-PC revenue is related to display?

John Goldsberry

Somebody is trying to pull that figure, if she finds it; I'll share it with you.

Richard Gardner - Citigroup

Okay. And final question for me is, you're still generating very low single digit gross margin percentages on your PC products, which is way below of what your competitors are generating, even Hewlett, which has roughly the same distribution model as generating low double-digit gross margin percentages on their consumer business. I'm wondering if you've identified any specific initiatives to get the gross margin on PCs back up and what you think you can do there?

Ed Coleman

I think it comes down to the same things that we've talked about, that we are in fact focusing on, which is product innovation, get fresher product out there more frequently than we have in the past, which can command higher margins and improve our operational execution, so that we are making the best use of the COGS in that business as we can. It’s fresher products, better products, more frequent updates, and better operational execution.

John Goldsberry

To come back to your prior question, displays accounted for between 8 and 9% of revenue during the quarter.

Richard Gardner - Citigroup

Okay. And that's the portion that's included in that 15.4, John? Or is all of that included in the 15.4% of non-PC revenue? Or is some of it actually included with the product categories?

John Goldsberry

Okay. So that's sales of standalone monitors.

Richard Gardner - Citigroup

Okay. So it includes stuff that would be in non-PC as well as stuff that would be bundled with a PC at point-of-sale?

John Goldsberry

No, it does not include stuff that would be bundled in an all-in-one.

Richard Gardner - Citigroup

All right. Okay. Thank you.

Operator

(Operator Instructions). Your next question comes from the line of Bill Fearnley with FTN Midwest.

Bill Fearnley - FTN Midwest

A couple of questions for you, if I could, on the channel. Can you give any additional color on the traction in the channel? I know that you break out your Best Buy business on an annual basis, but can you make any specific comments versus Best Buy and traction outside of Best Buy, especially in the US? And then I have a follow-up.

John Goldsberry

Hold a second. In rough terms, Best Buy was probably 40% of the Retail business. And then in terms of international as a percent of Retail -- I'll have that figure for you in a second. And I guess what I would say is the outlook for our Retail business right now is very, very strong.

Looking at the rest of the year, we see very significant increases in our international business and that will be one of the things that will fuel the growth of the overall Retail business. At the present time, I'm told that international is 9.5% of Retail.

Bill Fearnley - FTN Midwest

Then if you look at your outlook for the retail business particularly in the U.S., how do you square that with -- we're starting to see more, particularly from the Lenovo brand as well. So, if we talk about Retail improvement, should we be talking about retail improvement in international markets, or are you looking for noticeable improvement in your Retail business in the U.S. market as well?

John Goldsberry

We're looking for improvement in our U.S. Retail business, no question about it. If you look at the past two quarters, margins were impacted by a variety of things. A fairly competitive environment, component cost increases, during the last six months we saw memory prices really spike and now they've collapsed. Panel prices went through a little bit of the same swing.

And lastly in connection with meeting all of our delivery requirements of our customers in connection with Vista, just given how huge a job that was and we're very proud of the job we did there. But to take care of our customers, we incurred a fairly significant amount of expedited freight, which has been referenced in our presentation. Those things are not going to continue here going forward.

Component costs have dropped very significantly, especially memory costs. We certainly don't see a repeat of the Vista launch and the competitive situation seems to have gotten easier. So all of those we see contributing to improved margins in our retail business looking forward.

Ed Coleman

I think we should also note that we do see international as being a significant growth opportunity for us as well.

Bill Fearnley - FTN Midwest

Does that mean that Europe or Asia-Pacific, giving any more color than on that?

Ed Coleman

I would leave it at international growth opportunities.

Bill Fearnley - FTN Midwest

Then when you look at the expediting that was required this quarter, can you give some more color on that because when you look at the Vista transition, there was a Vista add embargo that ended at the end of January, but theoretically you would have had February and March to catch up, so to speak, for the quarter on whatever needed to be expedited. So, I'm just curious, was it components that you had to buy or can you give any color on the expediting required this quarter? And you kind of hinted towards it, John, but does that go away this quarter in total or is there still lingering affect from expedition?

John Goldsberry

The thing I would emphasize to you despite the fact that Microsoft made their golden samples available a few weeks ahead of the launch, for companies like ourselves who have an Asian-based supply chain where we're shipping desktops across the ocean, that was extremely tight and so the biggest issue we had that resulted in a significant amount of expedited freight was just the need to update images, update drivers.

This all is a fairly big undertaking and then to make sure that we could have quantities on hand for our retailers when Vista launched. So we feel we did a very, very good job in this regard. We're very proud of it. We've heard other people had far more significant problems than we did, but the net result is we did incur some expedited freight in order to take care of our best customers.

Bill Fearnley - FTN Midwest

At the beginning of the quarter, mostly about Vista, though?

John Goldsberry

In other words, around the --

Bill Fearnley - FTN Midwest

Transition.

John Goldsberry

I'm sorry, February 1st time frame.

Bill Fearnley - FTN Midwest

Okay. One last follow-up, if I could. When you talk about non-PC revenue being 15.4% of revenue and then the displays as 8 to 9%, so you're basically saying if the non-PC revenue, the stand alone display business was a little bit more than half of that, correct? Is that the way we should be looking at it?

John Goldsberry

Right. So it's 8% out of the 15.

Bill Fearnley - FTN Midwest

Yes. That's what I'm saying. It's a little more than half. I just wanted to double check.

John Goldsberry

That is correct.

Bill Fearnley - FTN Midwest

Thanks, guys.

John Goldsberry

Thank you.

Operator

(Operator Instructions)

John Goldsberry

Just to add to the answer to that last question, in Retail, which of course accounts for the largest portion of our business, the principal attaché that you have is monitors. So given how important the Retail business is to our overall mix, I guess you shouldn't be surprised that monitors constitute a very significant portion of our non-PC revenue.

Operator

Your next question comes from the line of Jean Orr with Nutmeg Securities.

Jean Orr - Nutmeg Securities

Thank you. I was wondering on the Vista if you think that is stimulating the PC market overall and what kind of impact do you see that might have during the course of the rest of the year?

Ed Coleman

I think the impact in Q1 was really more of a seasonality question in terms of obviously delaying sales in January and the quarter ended up being much more back-end loaded. Longer term, the impact of Vista, I think, may be on the size and configurations of machines. More broadly to the degree that Vista helps the PC become the hub of the home, longer-term it's going to enhance opportunities in the consumer marketplace. But I don't think there's any huge wave of business coming in 2007 just because of Vista.

Jean Orr - Nutmeg Securities

Do you have any feedback from the early users in terms of -- I guess I'm just thinking, maybe anecdotal, but in terms of what their response to it is, whether they find it to be easy to expand with a they're doing and that sort of thing?

John Goldsberry

I don't know that we're really the ones to answer that question for you. What I will say is this, clearly with us having moved all of our consumer products to Vista and with people getting used to Vista, it certainly is generating a fairly significant amount of call volume in terms of tech support and customer support, but that's to be expected with a new operating system. People are learning how to use it.

Jean Orr - Nutmeg Securities

Can you compare it at all with, say, the introduction of XP?

John Goldsberry

Well --

Jean Orr - Nutmeg Securities

The level of questions, et cetera.

John Goldsberry

Wasn't here at that time.

Jean Orr - Nutmeg Securities

Thank you.

Operator

(Operator Instructions) We do have a follow-up question from the line of Andrew Neff with Bear Stearns.

Andrew Neff - Bear Stearns

Just a follow-up on the Vista question. Are you continuing to offer an option to use XP instead of Vista, or have you switched over entirely to Vista, and the same question for business?

Ed Coleman

I think we've predominantly shifted over completely to Vista on the consumer side. And on the Pro side, the business side, very few professional customers or business customers are looking at Vista right now, or are looking to buy Vista-based machines right now. Obviously, that will change over time as they refresh their images Enterprise wide. At this point, our Professional business is still -- is non-Vista.

Andrew Neff - Bear Stearns

Thank you.

Operator

At this time, there are no further questions.

Marlys Johnson

Thank you everyone for joining with us. A replay of this conference call will be available on the home page of the gateway.com website for 24 hours and thereafter archived on the Investor Relations webpage. There will be a telephonic replay of this conference call beginning tonight at 7:30 p.m. Eastern time and running until midnight Eastern Time on Thursday, May 10. That number is 706-645-9291 with a pass code of 7662010. Have a good evening.

Operator

This concludes today's conference call. You may now disconnect. Have a good evening.

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