The VAR Guy continues to hear from partners who suggest VCE — the startup funded mainly by Cisco Systems and EMC — is undergoing a reorganization. A spokeswoman for VCE on August 15 said company officials were traveling for the next two days and were not available for immediate comment. The VAR Guy estimates EMC, Cisco and other investors have lost a combined $228 million on the VCE effort so far — though an EMC SEC filing suggests “momentum continues to build” for VCE. Here’s a look at The VAR Guy’s math… and VCE’s importance to channel partners.

First, a little background: VCE strives to organize storage, compute, virtualization, networking and management into an integrated solution. Key investors include Cisco, EMC, VMware and Intel. But it sounds like EMC and Cisco are VCE’s biggest financial backers.

Overall, The VAR Guy agrees with VCE’s vision — many data center partners welcome the concept of an integrated, standardized data center solution from Cisco, EMC and VMware. The proposed VCE solution, Vblock, cloud help partners and customers to more rapidly deploy public and private clouds.

SEC Filings Reveal Some Math

But how much will it cost Cisco and EMC, in particular, to fulfill VCE’s vision?

According to an August 2011 SEC filing from EMC:

  • As of June 30, 2011, EMC has contributed $173.5 million in funding and $7.8 million in stock-based compensation to VCE since VCE’s inception.
  • EMC’s net accumulated loss from VCE is $132.3 million.

Cisco’s VCE-related funding efforts are less clear, at least for the moment. The networking giant will likely provide some clarity when Cisco’s latest quarterly filing debuts on the SEC web site; Cisco announced quarterly earnings on August 10 and the related SEC filing typically debuts a few days after such an announcement.

Estimated VCE Losses to Date

In the meantime The VAR Guy has been doing some quick math based on EMC’s SEC filing.

  • Calculation One – How Much Has Cisco Lost?: If EMC’s 58 percent stake in VCE has generated a $132.3 million net loss, then Cisco’s 35 percent stake in VCE is likely worth a $79.8 million net loss to Cisco. (The math: 35 X 132.3 / 58 = 79.8).
  • Calculation Two – VCE’s Estimated Total Loss to Date: Using the first calculation, Cisco and EMC have a combined 93 percent stake in VCE, representing roughly $212.1 million in total VCE losses ($79.8 million + $132.3 million) so far. Extend that math to the 100 percent ownership pie, and VCE apparently has lost about $228 million as of June 2011.

Of course, The VAR Guy’s math makes some risky assumptions that could be wrong. For instance,  The VAR Guy assumes the Cisco and EMC percentage ownerships in VCE have not fluctuated, and each percentage point of ownership likely represents an equal amount of net loss. Still, there’s always the chance that Cisco and EMC may have increased or decreased their ownership stakes as other investors (example: Intel) joined the party.

Confirmed Figures

Even if you dismiss The VAR Guy’s extended math, EMC has confirmed that its 58 percent stake in VCE has generated a $132.3 million net loss for EMC so far. So it’s safe to assume Cisco’s 35 percent stake in VCE is generating tens of millions in losses as well.

Barring a change of direction it sounds like the losses will continue. Back in that May 2011 SEC filing, Cisco indicated “over the next 12 months, as VCE scales its operations, [Cisco] expects that it will make additional investments in VCE and may incur additional losses, proportionate with the Company’s ownership percentage.”

Maintaining a Long-term View?

That said, keep in mind: It often takes technology startups numerous years to turn a profit.

In the meantime, is VCE meeting financial expectations set mainly by EMC and Cisco? EMC, for one, sounded upbeat in its August 2011 SEC filing, stating: “momentum continues to build at VCE Company LLC, our joint venture with Cisco and investments from VMware and Intel, which offers the Vblock converged infrastructure product for building out cloud data centers.”

Still, nagging rumors about VCE organizational changes continue. And as of August 15, VCE executives were traveling for the next two business days and not available for comment, according to a spokeswoman for the company.

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6 Comments on “VCE Losses For Cisco, EMC & Investors: Around $228 Million?”

  1. Chuck Hollis Says:
    August 16th, 2011 at 1:44 pm

    I understand what you’re trying to say here, but I think you’ve missed a kfundamental point — the revenues associated with VCE flow back to the parent companies, and aren’t broken out separately.

    Put differently, the “losses” you’re writing about are actually “expenses”. They’re offset by revenue that show up elsewhere. And none of the parent companies break out revenue to that level of detail.

    This shouldn’t come as a surprise — see Wikibon’s posts here (http://wikibon.org/blog/vce-journey-and-balance-sheet/) and a more vibrant post here (http://wikibon.org/blog/emc-bleeds-only-one-color%E2%80%A6and-that%E2%80%99s-green/)

    I hope you can clarify this point for your readers — as it stands, the post is very misleading.

    Thanks!

  2. John Says:
    August 16th, 2011 at 2:03 pm

    I agree with the overall VCE mission, and I am sure a lot of others do as well.

    The rumors you have been hearing about layoffs, I am hearing the same things from others in this arena. It seems to be on the Operations and Service Delivery side, as those employees seem to be the most vocal about being let go on linkedin and other sites.

    Makes me think of the game Jenga. Take out too many pieces of wood and the tower falls down.

    The question is–if this is confirmed by the company [VCE]. Will they be able to leverage the parents to pick up the slack?

    If not, my companies’ potential investment in a Vblock in the future may be tossed aside, for something else.

  3. Chuck Hollis Says:
    August 16th, 2011 at 2:18 pm

    To be honest, I haven’t heard anything about layoffs, etc. And, even if I did know something, I probably couldn’t comment anyway.

    On a more philisophical note, just about every IT vendor in the industry is continually refining their labor model these days — adding and subtracting to get the right mix. To do otherwise would be foolhardy.

    What bothers me is the alarmist tone you’ve decided to take — for which I see absolutely no justification whatsoever.

    Kind of like “if a big meteor hits the earth, we’re all dead”. Technically a true statement, but very unlikely indeed. At least, I hope so.

    I think you’re also losing sight of the obvious. A Vblock is 100% comprised of standard price-book items from V,C and E. Each parent company provides world-class support (both individually and cooperatively) and is not in the habit of leaving their customers (or their partners) holding the bag.

    I appreciate your concern, but I think there are bigger challenges to go focus on, especially in the VAR community.

    For example, I routinely meet VARs who promote their value-add as buying and integrating disparate components. In a world of pre-integrated infrastructure (Vblocks and others), what is to become of their value proposition?

    For me, the industry trend is pretty clear — IT infrastucture is growing up. You’ll see more pre-integrated offerings from all the usual suspects going forward: IBM, HP, Dell, Oracle, etc. And, of course, VCE.

    What I’d like to see is more discussion around the new opportunities for resellers and integrators in this new model — because that’s what we’re always being asked about.

    Thanks!

  4. The VAR Guy Says:
    August 16th, 2011 at 3:51 pm

    Chuck, John: The VAR Guy appreciates your comments. A few thoughts…

    1. Net Loss?: The SEC filings point to EMC’s “accumulated net loss” on the effort, hence The VAR Guy’s conclusion that the figures represent how much EMC is in the red on VCE so far. But The VAR Guy will check out the links you shared.

    2. Alarmist?: Perhaps the headline was a bit dramatic. But The VAR Guy strives to explore the true state of IT vendors, and the potential implications for channel partners. Yes, there’s a need to explore “new opportunities” for VARs. But those channel partners also need to know about the health of their vendor partners.

    3. Layoffs?: Admittedly, layoffs have not been confirmed. They can only be considered speculation at the point, though multiple sources close to VCE tell The VAR Guy that there have been cuts/changes. And generally speaking, it’s strange that VCE executives are out of the office on business travel and unavailable for comment for at least 48 hours.

    4. Constructive Criticism: Chuck, The VAR Guy does appreciate your thoughts and will keep your constructive criticism in mind.

    -TVG

  5. aut30 Says:
    August 16th, 2011 at 4:14 pm

    I completely agree with Chuck. Those are expenses and they do not account for the profit on the sale of the hardware/software/services back to the parents.

  6. The VAR Guy Says:
    August 22nd, 2011 at 9:35 pm

    Chuck, Aut30: The VAR Guy will continue to keep your constructive criticism in mind. It’s been more than a week since our resident blogger requested comment from VCE… Still no comment.
    -TVG

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