Dell's second quarter: Another milepost in the turnaround tale

Dell reports its fiscal second quarter results on Thursday after market close and analysts are turning optimistic about the company's turnaround prospect amid better consumer notebook designs, emerging market revenue and solid server sales growth.

Dell is expected to report fiscal second quarter earnings of 36 cents a share on revenue of $15.95 billion, according to Thomson Reuters. Dell doesn't provide financial guidance, but Wall Street is expecting earnings of 41 cents a share on revenue of $16.7 billion for the third quarter.

Analysts have been turning increasingly upbeat about Dell's prospects and IDC's server statistics on Wednesday only reinforced that general idea that the company is on the right path.

Here's the crib sheet ahead of the earnings report:

Server sales expected to be better than expected. Cowen & Co. Louis Miscioscia said in a research note that Dell's server revenue should be about $1.7 billion, but could hit $1.87 billion with revenue growth of 15 percent. That incremental revenue could add as much as a penny a share to earnings. HP also reported strong server gains and Dell has been gaining on its larger rival. SMB and emerging market gains. Small business and emerging mar

kets are the growth engines for Dell. In fact, if Dell beats estimates it will most likely because of those two markets. Miscioscia is among the more bullish on Wall Street and projecting revenue of $16.2 billion, well ahead of the consensus outlook. Dell recently unveiled four SMB focused Vostro PCs for emerging markets with limited configurations. Dell also launched a new Latitude lineup focused on business users.

Cost cutting progress. Analysts across the board are closely Dell's progress in cutting operating expenses and expect more layoffs from the company. However, cost cutting is likely to be offset by aggressive pricing in the quarter. Toss in marketing for new products and Dell may be cutting operating expenses only to hold the gross margin fort at best. "Our estimates reflect an 18.1% gross margin, down 187 bps year over year, due to aggressive pricing, commodity pricing returning to normalized levels and increased sales through retail channels," said Cross Research in its earnings preview.

Retail channel shelf space. Dell in recent quarters has stormed the channel, but it's not clear that it is gaining shelf space. UBS analyst Maynard Um notes:

Our recent retail channel checks indicate no shift in PC shelf space across major retailers, with HP dominating and Dell still having fairly limited SKUs in many major US retailers. While recognizing our retail checks are not

representative of the global market, we feel these checks provide a decent idea of regional channel presence. Given recent product introductions and its strategy, we believe Dell's presence in the US retail channel could increase in the coming quarters.

In addition, Dell is likely to talk up its consumer sales and its penchant for design. Dell has made a lot of progress toward its goal of generating product lust. Some color on Dell's software plans. Dell has quietly building up its software business especially for software as a service. It is also developing on Salesforce.com's force.com platform and tweaking Vista to make it more palatable. Although the focus will obviously be on hardware any incremental color on Dell's software plans could be notable.

Analysts generally expect Dell to tout its retail gains ahead of its peak consumer selling season and a positive tone from CEO Michael Dell, who recently bought a big chunk of stock. Dell is still a work in progress, but appears to be headed in the right direction.