Unless your name is Hewlett-Packard (NYSE:HPQ) or Apple (NASDAQ:AAPL), you've had a rough year in the computer industry. Dell's (NASDAQ:DELL) in turmoil. Gateway's (NYSE:GTW) earning just pennies per share -- when it's lucky. And tomorrow, the latter tries to improve on last year's breakeven first-quarter results.

What analysts say:

  • Buy, sell, or waffle? Seven analysts follow Gateway. One says buy it, two say sell it, and everyone else counsels holding.
  • Revenues. On average, they expect to see sales fall 9% to $983.6 million.
  • Earnings. A penny of profits per share is predicted.

What management says:
Back in February, new CEO Ed Coleman characterized Gateway's fourth-quarter results as "mixed." Market share stood unchanged against a year ago at 6.6% -- third place in the U.S. behind Dell and HP. Unit shipments declined 5%. Gross margin slid 100 basis points year over year to 5.2%, thanks in part to what Coleman said were "supply constraints and the resulting impact on our supply chain," and in part to the firm's lower-margin retail segment making up an ever larger proportion of total sales.

The good news is that after reporting preliminary results that put net income at $0.02 per share for the year, Gateway found another penny between the seat cushions. It ultimately reported $0.03 per share by the time it published its final numbers for the year in late February.

What management does:
On a rolling basis, we're finally seeing some improvement take hold at Gateway. Rolling gross margins ticked up 10 basis points last quarter, the slide in operating margins halted, and the firm ended the year with a positive net margin -- albeit barely.





























All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Looking ahead, Coleman named four factors that he believes will help move Gateway forward in 2007: "Cost structure and process-improvement initiatives launched in the fourth quarter, combined with continued product innovation, strong customer relationships and an increased focus on the consumer market." Most of these moves I agree with. Gateway needs product innovation to differentiate its comps from those of every other computer maker in the universe, so as to open the way to charging higher prices and earning better gross margins. Meanwhile, with gross margins sitting in the single digits currently, the company simply must reduce costs if it's to drop any profits to the bottom line. There's just no room for fat there. It must all be cut.

As for "increased focus on the consumer market," I'm hoping what Coleman meant here is not so much an effort to sell more computers through retail, but rather an effort to sell its retail computers at higher margins. One year ago, the firm was grossing twice what it got here in Q4 of 2006. With retail sales being by far the firm's largest revenue source, efficiency gains here could go a long way toward restoring Gateway's health.

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Fool contributor Rich Smith does not own shares of any company named above.