VMware CEO Gelsinger Sees Dell-EMC Synergies, Shares Jump On $1.2B Share Buyback

VMware CEO Pat Gelsinger on Tuesday told Wall Street analysts that he sees "significant opportunities for ongoing revenue synergies" from the blockbuster Dell-EMC merger, which has taken a devastating toll on VMware shares.

As if to prove the point, VMware, a subsidiary of EMC, announced that its board of directors has authorized a repurchase of up to $1.2 billion of Class A shares through Dec. 31, 2016.

"This provides an opportunity for us to return cash to shareholders given the confidence we see in the business," said Gelsinger.

[Related: Partners: COO Eschenbach's Exit Is Sign Of Ongoing VMware Channel Turmoil]

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The stock repurchase, combined with the report of better-than-expected results for its first fiscal quarter, ended March 31, sent VMware shares up 9 percent, or $4.52, to $54.98 in after-hours trading.

The planned stock repurchase came after VMware reported earnings of 86 cents per diluted share on sales of $1.59 billion for the quarter. The Wall Street consensus was earnings of 84 cents per diluted share on revenue of $1.58 billion.

The VMware after-hours share gains are a respite from the beating VMware shares have taken since Dell announced that it planned to acquire EMC in a $67 billion blockbuster deal -- the largest in IT history -- last fall.

VMware shares had plummeted from $78.65 before the deal was announced to $51.46 on Tuesday.

In a Securities and Exchange Commission filing in February, Dell warned that a whopping $14 billion drop in the market capitalization of VMware is going to negatively affect the final price of the blockbuster acquisition of EMC. At that time, Dell said the total value of the blockbuster acquisition has dropped by nearly $8 billion, from $67 billion as originally proposed to $59.5 billion.

Gelsinger, for his part, said he sees gains coming from both the existing relationship with Dell and future synergies once the deal is finalized.

In fact, Gelsinger said, VMware is already seeing "strong momentum" from new Dell VMware-based channel offerings. Dell announced earlier this month that it will resell VxRail, which includes VMware software and VMware VSAN.

What's more, Gelsinger said, VMware is benefiting from Dell assessment tools aimed at providing customers an IT health checkup to drive "broader software-defined data center solutions."

"The synergy opportunity is very significant here," said Gelsinger. "We have spent a good amount of time working with our Dell counterparts really going through the details of that."

Gelsinger said partner confidence was bolstered at a partner summit in March where Dell CEO Michael Dell addressed VMware's highest-tier partners.

"It was a robust conversation as he was addressing the questions of our key OEM partners firsthand," said Gelsinger, referring to Michael Dell's discussions with partners. "We left that partner leadership conference very encouraged by the ongoing health and opportunity that we have overall for the VMware ecosystem."

Jamie Shepard, senior vice president for health care and strategy at Lumenate, No. 145 on the 2015 CRN Solution Provider 500, said he does not see clear Dell-EMC-VMware synergies out of the gate, with the Dell-EMC deal set to be finalized in the next several months.

"For the next year or two, there [are] going to be disparate offerings in the market from VMware, EMC and Dell," he said "At the same time, there is strong unity with VMware VXRail and VSAN product."

Lumenate, in fact, is seeing robust sales of new software-defined infrastructure from VMware including NSX, VSAN and Horizon.

That assessment mirrors the VMware quarterly results, which included 100 percent growth in NSX license revenue and 200 percent growth in VSAN license bookings.

VMware said it recently closed its largest ever VSAN deal with a global investment bank and that it now has 1,400 NSX customers with 350 customers in production deployment. Total bookings of VMware's vCloud Air hybrid public cloud, meanwhile, which competes directly with Amazon Web Services, grew more than 25 percent compared with the year-ago quarter.

Nevertheless, several top executives for VMware partners, who did not want to be identified, said they expect significant channel disruption once the deal is completed.

"We are already seeing pricing pressure on our EMC business," said the CEO for a top EMC enterprise partner, who did not want to be identified. "This deal is not going to help partners at all. If this is any indication of the model going forward, then this deal is going to cause a lot of VARs to lose margin. I see partners getting squeezed."