Poway, Calif. ? Ted Waitt had his eureka moment over a baccarat table two years ago at Comdex, the technology trade show in Las Vegas. His computer company, Gateway Inc., was hemorrhaging money and becoming an also-ran against Dell Inc. and Hewlett-Packard Co.

Waitt and a longtime supplier began talking about the flat-panel TVs that were turning up in high-end consumer electronics showrooms. They were sleek enough to hang on living-room walls like paintings and offered sharper images than standard tube TVs. But with prices starting around $5,000, few people could afford them.

“Wait a minute, this is a no-brainer,” said Waitt, Gateway’s chairman and chief executive officer. What if he could sell the TVs at more competitive prices and still make a profit?

And so he did.

In the last year alone, Gateway has become a serious player in flat-panel TVs and entered hot categories like digital cameras, camcorders and music players. Its stores got a $20 million facelift that relegated PCs to the back to make room for the new gizmos.

Other big changes are largely invisible to consumers. Gateway stopped manufacturing its products — save for some large, custom accounts — and it hired outsiders to handle everything from shipping to employee benefits.

As a result, Gateway will employ 6,700 people by the middle of next year, down from 11,500 at the end of last year and 25,000 in 2000.

“It was just a gut-wrenching level of change,” said Rod Sherwood, executive vice president and chief financial officer.

Yet a turnaround is anything but certain for a company that has lost money in 11 of its last 12 quarters.

Gateway CEO Ted Waitt poses by a display of Gateway's liquid-crystal display televisions at the company's headquarters in Poway, Calif. The company that broke into the market with computers has shifted its focus to flat-screen televisions and other products such as camcorders and digital cameras. Analysts say the company's new strategy will be tested during the holiday shopping season.

Can company survive?

The holiday season will be a pivotal test of whether Gateway’s gamble pays off. On Tuesday, the company rounded out its lineup by expanding its offering of TVs to 12 models and adding two digital cameras, a DVD recorder and a digital music player.

The holiday results may determine the company’s chances of competing against the likes of Sony, Panasonic and Samsung. Gateway’s strategy has been to undercut well-known brands with prices in the ballpark of no-name manufacturers found at Wal-Mart and other discount retailers.

Steve Baker, an analyst at NPDTechworld, gives Gateway high marks in such higher-margin categories as flat-panel TVs and digital cameras. He notes only one hiccup in execution — the indefinite delay of hand-held computers, originally scheduled to be launched in July.

“My early impressions are that most of what they’ve done has been right,” Baker said. “My biggest worry is how many things they can actually pull off in such a short period of time.”

And Gateway may face a new threat from old foes. Last month, Dell introduced a 17-inch liquid-crystal display TV for $699 — matching Gateway’s price — and two digital music players in what it described as an initial assault on the consumer electronics market.

Dell can’t match Gateway with a chain of retail stores — a key advantage if customers want to see and touch the pricey gadgets before digging for their wallets. And Gateway ended the third quarter with more than $1 billion in cash, giving it some cushion as it tries to reverse its decline in sales.

Restructuring company

Gateway CEO Ted Waitt unveils new products during a news conference in a Gateway store in New York. The company that broke into the market with computers is expanding their line to include other products like digital cameras. Waitt announced the new products Tuesday.

Although last year’s Christmas season was disappointing for Gateway, Waitt concluded that his plasma TV idea was a winner that augured well for further diversifying away from the now-commoditized world of PC sales. The 42-inch TVs had sold out quickly at $3,000 apiece.

So the ponytailed executive and a new cadre of lieutenants charted plans to remake the company.

Sherwood, a 49-year-old mountain climber who worked at Chrysler Corp. during its turnaround in the 1980s, joined in October 2002. Other newcomers were Joe Formichelli, 60, a former IBM executive who set out to overhaul manufacturing and distribution; Scott Edwards, 41, a marketer from Sony’s consumer electronics division; and Bill Parker, 56, who came from Gap Inc.’s Banana Republic chain to remodel its shrinking chain of nearly 200 stores.

In May, Waitt walked on stage at a San Diego hotel to tell analysts what he was up to. Wearing his signature blue jeans and blazer, Waitt boasted that Gateway could slash prices and still post healthy profits simply by avoiding the usual retail channels, like Best Buy and Circuit City. Instead, it would sell over the phone, the Internet and at Gateway’s own stores.

Around the same time, Gateway decided to close its PC assembly plant in Hampton, Va., eliminating 450 jobs as part of broader move to exit manufacturing. It hired Affiliated Computer Services Inc. to take over myriad corporate functions from payroll administration to finance and accounting. Affiliated performs some of those jobs in Dallas and plans to shift more to India.

Gateway decided to stop funneling merchandise through its own warehouses in North Sioux City, S.D., on its way to stores. Beginning this month, Ingram Micro Inc. will handle that work from warehouses in Mira Loma, Calif., Millington, Tenn., and Jonestown, Pa.

How it began

Waitt, a 40-year-old University of Iowa dropout and son of a fourth-generation cattleman, set up Gateway in Sioux City, Iowa, in 1985. He moved the company to San Diego in 1998 and later to suburban Poway.

Waitt has a home in the Sioux City area, which has been stung by the latest round of job cuts, and visits about once a month. The company still employs about 2,000 people in the region.

On a recent trip home, after the layoffs and his father’s death, Waitt said that while some wished him well — even people laid off by Gateway — he did encounter hostility from a nurse who said the area would have been better off had he never set up shop there.

Personal trials aside, Waitt’s biggest challenge may come from Dell, whose ability to wring out costs in the manufacturing process has caused Gateway fits in the PC market.

Waitt has no illusions that the head start he’s got over his old nemesis in consumer electronics will last for long.

Dell is “extremely tough, they’re ruthless,” he said. “They’ll pay some lip service to (consumer electronics), they’ll wait and see what happens, they’ll test a few things out, then they’ll jump in in a bigger way. But by that time, we’ll have critical mass and there’ll be enough room for both of us.”