Nov. 2 (Bloomberg) -- Gateway Inc., the third-largest U.S. personal-computer maker, reported a 20 percent increase in third- quarter profit because of a one-time tax benefit. Sales fell as PC shipments were little changed.

Net income rose to $18.2 million, or 5 cents a share, from $15.1 million, or 4 cents, a year earlier, Irvine, California- based Gateway said today in a statement. Sales fell 5.5 percent to $963.2 million.

Chief Executive Officer J. Edward Coleman, who took over in mid-September, inherited a company that had posted three straight quarters of losses and was struggling to reach buyers while challenging larger rival Hewlett-Packard Co. on price. Shipments rose less than 1 percent to 1.17 million units. Direct sales fell 44 percent, while more-costly retail sales gained 4.2 percent.

``The pricing environment, competitive environment in retail continues to stiffen, yet despite that we continued to perform well,'' Coleman said in an interview after the earnings release. ``It remains a very efficient model for us in going to market.''

Gateway had a tax gain of $8.2 million in the quarter ended Sept. 30.

Six analysts on average had anticipated third-quarter profit of less than 1 cent a share, while three analysts estimated sales of $1.06 billion, according to a Thomson Financial survey.

Shares of Gateway fell 1 cent to $1.64 at 4 p.m. in New York Stock Exchange composite trading, and have declined 35 percent this year. The company sells computers under the Gateway and EMachines brands direct to customers and through more than 9,500 stores worldwide.

Cost Structure

The company's cost structure is too high, Coleman said during a conference call with analysts. He plans to start a cost- cutting program to pare $30 million to $35 million annually, including job reductions. Results of these measures will begin to show up in the first quarter of 2007.

Gateway eliminated 100 positions yesterday as part of the cost-cutting plan, company spokesman David Hallisey said.

Retail sales, including orders from Best Buy Co. Inc. and Staples Inc., rose to $626 million from $601 million a year earlier. They accounted for 65 percent of total revenue, compared with 8 percent for direct sales through Gateway's Web and telephone order system.

Direct sales, which are more profitable than sales through retailers, dropped to $75 million from $132 million a year earlier, and were down 3 percent from the second quarter. Direct shipments fell 51 percent to 35,000 units.

Professional Sales

The ``disappointing'' direct sales are a result of the company's decision to focus on PC enthusiasts willing to spend more on powerful machines, Coleman said. That strategy helped avoid a conflict with retail partners, who are selling to the broader consumer market, he said. ``We're looking at that strategy and assessing it.''

Professional sales, including small and medium businesses, government and education accounts, fell 8 percent to $263 million from a year earlier and gained 5 percent from the second quarter.

Margins in the professional business widened after the group cut jobs and travel and market expenses to lower costs, Gateway said.

Personal computer demand in the U.S. was flat after several quarters of strong growth, according to researcher IDC in Framingham, Massachusetts. Gateway's focus on the U.S. ``limited its overall growth,'' IDC said.

Shareholders

A group of shareholders, discouraged by the slide in shares, last week asked to have three representatives named to the board. The group, led by Harbinger Capital Partners and including Firebrand Partners, also asked Gateway to scrap a plan allowing investors to buy stock at a discount if someone makes a takeover offer the company doesn't support. Firebrand and Harbinger together own almost 11 percent of Gateway.

Scott Galloway, managing partner of Firebrand, said in an Oct. 26 letter that the company should be sold ``if, working together, we cannot leverage these assets.''

It's not the first time investors have tried to spur the company into action. In September, Gateway's board rejected a $450 million offer for its retail unit by Lap Shun Hui, who sold his EMachines Inc. to Gateway in 2004.

``We had a good quarter particularly compared to previous quarters,'' Coleman said. ``I came here with a sense of urgency and I think the team has a sense of urgency.''

To contact the reporters on this story: Connie Guglielmo in San Francisco at cguglielmo1@bloomberg.net.

Last Updated: November 2, 2006 19:02 EST