Dell's challenge: Can it keep up with HP?

Dell's financial results are expected to be solid as the company benefits from a surge in PC demand, but there is a question whether the company can keep pace with Hewlett-Packard.

Dell's financial results are expected to be solid as the company benefits from a surge in PC demand, but there is a question whether the company can keep pace with Hewlett-Packard.

On HP's earnings conference call, CEO Mark Hurd made it very clear that the company intends to use its scale to manage potential component shortages better and be opportunistic. Does Dell have the scale to compete?

We'll find out. Wall Street is expecting Dell to report fourth quarter earnings of 27 cents a share on revenue of $13.85 billion.

Overall, Dell is expected to at least meet those expectations, but the company can be a bit of a wild-card on a quarterly basis. Dell chief Michael Dell has been predicting a PC upgrade cycle and judging from results from HP and Lenovo he should get one.

Deutsche Bank analyst Chris Whitmore wrote in a research note:

We believe Dell benefited from strong consumer PC unit shipments and early signs of recovery in corporate PC demand. We also expect solid demand in Server / Storage due to improving enterprise demand and datacenter upgrade activity. Although components were tight throughout the quarter, we believe Dell sacrificed share to maintain margins.

Can Wall Street get revved up about Dell, a company that is losing share and is highly tethered to the corporate PC upgrade cycle?

HP gained market share and Hurd noted that the company is well positioned to grab more spending as servers and storage hardware merges and next-gen data centers are built. When it comes to servers and next-gen data centers, Dell is playing in the land of giants---notably IBM and HP.

Here are a few mileposts to watch when Dell reports:

Windows 7 demand. Whitmore expects Dell to show strong consumer demand and notebook unit growth. Notebook unit growth should be north of 20 percent compared to the year-ago quarter.

Enterprise PC buying. Companies are expected to begin the move to Windows 7 in the second half. At least that's what Dell is counting on. How much of a tailwind can Dell garner from the enterprise and small business upgrade cycle?

Stifel Nicolaus analyst Aaron Rakers notes:

We continue to view a recovery in Dell's Large Enterprise vertical as the most meaningful potential positive catalyst over the coming quarters.

Indeed, the enterprise represents largely 26 percent of Dell's total revenue.

The integration of Perot. Analyst expect Dell to show some revenue gains due to the closing of the Perot Systems purchase. Expect Dell to highlight the integration.

Cost cutting (are we there yet?). Dell has been talking about reducing costs by $4 billion. Analysts are expecting the company to be a little more than halfway to those savings. Gross margins will be closely watched. The consensus target is 18 percent.

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