DALLAS -- Dell Computer Corp. yesterday reported a stunning setback in its notebook-computer operations and an unexpected drop of 48.5 percent in its first-quarter profits -- its first decline in profits in 14 quarters.
The news knocked Dell's share price into a free fall, and it ended the day down $7.375, or 23 percent, to $24.75, in Nasdaq trading.
Michael Dell, the company's chairman and chief executive, said delays and cancellations of some new notebook models already in production had required charges that pared the company's pretax income by $20 million in the quarter.
Mr. Dell said the company had planned for notebook models to contribute 20 percent to 25 percent of its yearly sales, or about $700 million this year. But sales of notebook machines were only about $40 million in the quarter, or 6 percent of quarterly sales.
Other Dell operations were strong, and revenues continued to surge, rising 83.7 percent, to $672.4 million, from the comparable quarter a year ago. Sales of desktop machines and servers, machines that function as libraries for several personal computers, more than doubled.
As recently as January, Dell shares were trading at $49. But investors turned on the company early in the year, apparently believing it was vulnerable to the continuing price wars in the PC business.
Mr. Dell said his concern about Dell's troubles in the important, fast-growing notebook market were growing for some months. Six weeks ago, he hired John Medeca, developer of Apple Computer's highly successful Powerbook computers, to overhaul Dell's notebook business.
"We are really restudying the whole notebook business," Mr. Dell said. "We know we have an issue, and we're addressing it. We are building our team to be able to develop a line of first-tier, quality notebook computers."
Steven L. Eskenazi, an analyst at Alex. Brown & Sons in New York, said other companies that were market leaders in notebooks were reporting strong sales and that none had problems similar to Dell's.
"Dell doesn't have a competitive notebook," he said. "Their salesmen don't even bid" on large sales contracts offered by corporations that are big buyers of other Dell products.
With demand still strong for other products, Mr. Dell said, yearly sales for the company would exceed $3 billion this year, up from $2 billion last year.
The drop in quarterly earnings was the first time that earnings had not increased at Dell since the last quarter of its 1990 fiscal year, whichended in January 1990. The troubles then were related to a similar decision by Dell to cancel production of some new products he concluded were not what customers wanted.
"There definitely are some analogies" to that experience, Mr. Dell said. "The products in that case were desktop computers. You'll note that we went on to be very, very successful in desktops. These are notebooks, and I would foreshadow that we clearly intend to become a very, very successful notebook computer company also."