Dell's Q2: Time to worry about server revenue?

Dell's second quarter warts are well known: PC sales are going to be weak and the company's software and services transformation is incomplete. The wild card this quarter revolves around server sales. 

Dell's warts have been evident in recent quarters, but the company has managed expenses well. Meanwhile, Dell continues its transformation. Dell recently announced plans to acquire Quest Software in a deal that will change the company's software profile dramatically.

Wall Street is expecting second quarter earnings of 45 cents a share on revenue of $14.65 billion. Analysts also expect Dell to cut its fiscal 2013 outlook.

Wells Fargo analyst Maynard Um flagged worries about Dell's server sales. He said:

Where we see most risk in the quarter is in our server estimates, which calls for 9.9% year over year revenue growth. Our checks suggest a meaningfully slower market that could be down year over year. All else equal, we see $0.02-0.03 earnings per share risk to our forecast (not accounting for any operating expense offsets).

The server revenue worries could be an issue since Dell's core business revolves around the enterprise. Analysts widely expect Dell's PC sales to slip. Dell has allowed PC market share to slip in the name of better profit margins. That plan looks fine as long as higher-margin businesses work.

Jefferies analyst Peter Misek said that Intel's latest Romley server chips aren't generating a demand spike. Misek noted:

We expected servers to improve in Q2 and Q3 after the launch of Romley; however, Q2 shipments were flat Q/Q and Arrow, Avnet, and QLogic pointed to a lackluster Q3 for OEM server shipments. We think much of the preliminary Romley shipments will be for cloud players who use white box servers instead of Dell/HP.

If Misek is correct, Dell may see a Romney uptick at some point in the future. For now, cloud players aren't buying brand name servers.