Dell's Return with EMC and VMware: Growing PC Shipments, Paying Down Debt and Buying Back Stock

Dell Technologies Inc. (NYSE: DVMT) is currently overlooked and ignored by the market since it has rolled up EMC under its umbrella. The company has released its earnings report for the quarter ending February 3, 2017, but the big news here might really be how much stock the company is buying back. It is also hard to do a comparable earnings and revenue analysis since Dell has acquired EMC.

Due to its complexity with EMC and VMware Inc. (NYSE: VMW), Dell has almost no real analyst coverage and is largely ignored by the investing community. What stands out here is that investors have still been driving its shares higher and higher. They were up 16% year to date, without even considering the post-earnings and buyback update news. Its stock was also up over 28% since the pre-election close of November 8.

Dell’s non-GAAP fourth-quarter revenue was $20.6 billion, with non-GAAP annual revenue of $62.8 billion. Dell generated an operating loss of $1.7 billion, with a non-GAAP operating income of $1.8 billion, in the fourth quarter. For the full year, consolidated revenue from continuing operations was $61.6 billion and non-GAAP revenue from continuing operations was $62.8 billion. The company generated an operating loss of $3.3 billion, with a non-GAAP operating income of $5.1 billion.

The company ended the year with a cash and investments balance of $15.3 billion, an increase of $287 million from the third quarter. Dell also said up front in its release that the EMC deal makes it harder to compare and that it will have an impact on GAAP earnings. The filing said:

Due to the EMC transaction as well as the Dell going-private transaction, significant non-cash bridging items will remain between GAAP and non-GAAP results for the next few years. Prior-year historical Dell Technologies financials do not include EMC historical results, thereby impacting any year-over-year comparisons.

Since closing the EMC transaction, Dell Technologies has paid down a total of about $7 billion in debt. Its total amount spent for share repurchases has been $824 million of Class V common stock.

Dell’s client solutions group posted gains in commercial and consumer product categories. Revenue for the fiscal fourth quarter was $9.8 billion, up 11% from a year earlier. Revenue for the full year was up 2% at $36.8 billion. Dell’s operating income was $342 million for the quarter, and $1.8 billion for the full year.

PC shipments were 11 million in the fourth quarter, representing the largest volume of products shipped since the fourth quarter of 2011. Dell showed an 8.2% year-over-year PC shipment increase, with 16 consecutive quarters of year-over-year PC unit share growth and 150 basis points of unit share gained for the calendar year.

Back on December 13, 2016, Dell’s board approved a stock repurchase program for up to $500 million of shares of the company’s Class V common stock. It is only March now, but Dell has already done that. Dell’s 8-k filing with the SEC said:

As of the date of this report, the company has repurchased approximately 8.4 million shares of Class V Common Stock for $500 million under the Class V Group Repurchase Program.

And Dell will be buying back even more stock as well. The company’s SEC filing said:

On March 27, 2017, the Board of Directors approved an amendment of the Class V Group Repurchase Program to authorize the Company to use assets of the Class V Group to repurchase up to an additional $300 million of shares of the Class V Common Stock, exclusive of any fees, commissions or other expenses related to such repurchases, from time to time over a period of an additional six months. Shares may be repurchased under the amended program through open market purchases, block trades, or accelerated or other structured share repurchase programs. To the extent not retired, shares repurchased under the program will be placed in the Company’s treasury.

Part of the buyback is being funded via Dell’s stake in VMware. Before the sale contemplated by the March 2017 Stock Purchase Agreement, Dell Technologies beneficially owned 36,788,652 outstanding shares of Class A common stock and all 300,000,000 outstanding shares of VMware’s Class B common stock. The filing noted three different issues regarding VMware’s stock, as follows:

The repurchase of shares pursuant to the amended program is expected to be funded from proceeds received by the Company from the sale by a subsidiary of the Company of shares of Class A common stock of VMware, Inc. (“VMware”) owned by such subsidiary, pursuant to the terms of the stock purchase agreement described below. The Board of Directors has determined that, under the Company’s tracking stock policy, any repurchases pursuant to the program in accordance with the expanded authorization will be attributable to the Class V Group and therefore will not result in an increase in the number of retained interest shares in the Class V Group attributable to the DHI Group.

On March 29, 2017, the Company entered into a stock purchase agreement, dated as of March 29, 2017, by and among the Company, EMC Equity Assets LLC (“EMC Sub”), an indirect wholly-owned subsidiary of the Company, and VMware (the “March 2017 Stock Purchase Agreement”), pursuant to which VMware will purchase for cash $300 million of VMware Class A common stock (the “Class A Common Stock”) from EMC Sub. The Company will apply the proceeds from the sale to the repurchase of shares of its Class V Common Stock under the amended Class V Group Repurchase Program described above, but may use such proceeds for other purposes at the discretion of the Capital Stock Committee of the Company’s Board of Directors and the Board of Directors.

Under the terms of the March 2017 Stock Purchase Agreement, VMware will receive an initial share delivery of Class A Common Stock with a value of approximately $240 million on the sale date in exchange for $300 million in cash in an initial closing expected to occur on April 5, 2017, with the remainder of the Class A Common Stock to be delivered at a later date in a second closing expected to occur in the second quarter of the Company’s 2018 fiscal year. The total number of shares to be purchased by VMware under the March 2017 Stock Purchase Agreement will be based on the volume-weighted average per share price of the Class A Common Stock as reported on the New York Stock Exchange during a specified reference period, less a discount of 3.5% from that volume-weighted average per share price, and subject to adjustment in certain circumstances.

Dell Technologies saw its shares pop 2.1% to $65.25 on Thursday morning, in a 52-week range of $42.02 to $65.78.

VMware shares were last seen trading up 0.3% at $92.10. The 52-week range is $49.76 to $93.05.

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