Despite Murkiness, Executives Insist VCE Is Thriving5:00 PM EST Fri. Oct. 12, 2012
It's difficult to get a handle on exactly how VCE is performing when it comes to sales.
Neither VCE Chairman Michael Capellas nor new VCE CEO Praveen Akkiraju nor Executive Vice President Todd Pavone, each interviewed by CRN in recent months, would provide exact details on VCE's revenue performance, though they said VCE's average deal size is "well north of $1 million," and that 40 percent of VCE's revenue comes from repeat customers buying more Vblocks.
The company itself is growing. Heading into 2012, VCE was the subject of persistent layoff rumors based on the substantial reorganizations that took place in its sales, marketing and engineering organizations last year. But according to Pavone, VCE has hired and will hire hundreds of new employees in 2012.
A VCE spokesman told CRN that VCE had added 210 new employees as of May – 125 in the first quarter, and, as of late May, 85 in the second. VCE's total headcount as of that time was 1,058, and about 135 of those employees were in sales.
But some of VCE's most important channel-facing point people have left the company in the past year, too. They include executives such as Blake Salle, a longtime Cisco vice president who was VCE's senior vice president, worldwide sales and channels from July 2010 to November 2011, and is now vice president of sales at Silver Tail Systems; Russell Rosa, who spent 18 months as vice president, Americas channels at VCE and is now vice president, worldwide channels at Actifio; and Pete Koliopoulos, the former EMC vice president, global channel marketing, who spent 11 months at VCE as vice president, global partner marketing, and in June 2011 became vice president, marketing at distributor Arrow ECS.
Along with executive changes and reorganization headaches, VCE in its first two years also encountered a passel of technical challenges, such as numerous partner and customer complaints, early into the shipment of Vblocks, that EMC's Ionix Unified Infrastructure Manager (UIM) -- which automates how storage and virtual infrastructure are provisioned in the Vblock -- didn't work properly. VCE early on also had a hard time making its time-to-arrival commitment, solution providers said, and many Vblocks needed at least 60 days and sometimes 90 days to arrive following the initial assessment by partners of customer requirements. (Pavone maintains that VCE is now regularly hitting 30 days to 40 days.) Then there's the tricky role of VCE's distributors -- Arrow, Avnet, Tech Data, Ingram Micro and, in Europe, Magirus (whch is in the process of being acquired by Avnet) -- and whether they will become more than fulfillment mechanisms for VCE. Pavone said VCE has no plans to change its system of building Vblocks in-house for shipment to customers and partners. VCE will continue to build Vblocks itself at its facilities in Franklin, Mass., and Cork County, Ireland.
"Customers tell us our integration is the differentiation for us," Pavone said. "So we'll keep it internal for now. The vast majority of our business is through partners. But we listen to them, and to our distributors. [So] that's not to say things won't change in the future." VCE will also keep its testing and software development in-house, Pavone stressed.
"We have dozens of engineers running every imaginable x86 workload on Vblocks. They can tell a customer he can run SAP at 50 percent greater performance. We can show them the TCO and performance. You can't do that on a FlexPod, or on a reference architecture. Or on a VSPEX," he said. As for the financials, VCE's stakeholders maintain the company is not only solid, but hitting a run rate north of $1 billion. When VCE sells Vblocks, EMC and Cisco recognize income on their profit and loss statements. There's a management P&L on top of the VCE expense report, said EMC CEO Joe Tucci, but because VCE expenses show up below the line, they appear as a loss.
"The profit and the revenue flow back through the parents," Tucci told CRN in April. "So therefore, the more successful VCE is, in theory, the more money they'll lose. But what we do, underneath it all, is keep a management P&L. If we were losing that much money, we wouldn't be doing it. Obviously there was a loss. But at the levels we're headed to, we keep talking about sometime this year, and we haven't given an exact quarter, this will be a billion-dollar run-rate business. And I can assure you that, at that level, this will be a profitable business.
"We know how much of that profit went through the parents," Tucci said. "But you can't double-report. So it's in the [EMC] Symmetrix line, it's in the [Cisco] Nexus line, it's in the UCS line for Cisco, it's in the [EMC] VNX line, it's in VMware's profit. That's where the profit ends up. But some of the expense is down here, in VCE, in the business, And obviously if you do it that way -- and we do it that way -- you're obviously going to see a loss down here. But we're smart enough to understand it. We track what profits we make through that. And we are satisfied with the progress."
The thing to key in on isn't VCE's "loss" so much as what EMC and Cisco haven't disclosed about VCE's revenue and cannibalization of non-Vblock deals that include individual pieces from Cisco, EMC and VMware, said Jayson Noland, senior analyst at financial services firm Robert W. Baird and Co.
"The percent of cannibalization is probably hard for them to know," Noland said. "But we'd like to know how often does EMC win deals it wouldn't have otherwise been in? And what on earth is the revenue level for VCE? We need more color. Right now we're just guessing. We really don't know."
Many observers speculate about VCE being folded or pulled back into one of its parent organizations, but Tucci said that to do so would be a challenge. "The problem is: how do you pull it back in?" he said. "I think what makes it different and unique over VSPEX or FlexPod or anything like that is that this is a real skin-in-the-game investment for Cisco, EMC and VMware. And as a dedicated organization, with people that do very good things, if you pull it back in, then it becomes more like the other product. It loses its distinction. That's not what we're contemplating at all." Rather than a pull-in, said Tucci, EMC expects VCE to be a separate company in the coming years. But that doesn't mean either Tucci or Cisco Chairman and CEO John Chambers wouldn't have done things differently with VCE if given a chance to start over, he said. "Obviously, with the benefit of hindsight, 20-20, yeah, there are things we could have done better, things we would have done a little differently," Tucci said. One of those, Tucci said, was the transition out of the Acadia concept. "So obviously, if [I had known] this, [Chambers] and I would not have started out with Acadia. We would have started out with VCE. There's one right there," he said. "Acadia was a BOT, a build, operate and transfer. It's very different from where we ended up. Just the fact that we registered the Acadia name, just the fact that we started down that path, we'd say, wow, that's not where we want to be. And we moved it." Top Cisco executives have said on several occasions that Cisco will continue to support VCE. That Cisco also competes with EMC and VMware in certain areas is part of what Cisco is pragmatically describing as "compartmentalization" -- getting its salesforce to understand that it both partners and competes with many major vendors, and that's OK.
"When there's an opportunity to partner, i.e. EMC, we partner. When there's software competition against [VMware-owned] Nicira, they're a competitor," Chambers told CRN in October. "Microsoft is a great partner in the data center, maybe a great partner in terms of hypervisors, and then we compete against them in collaboration. IBM may be a partner in some areas and a competitor in others. What you see is an ecosystem."
VCE isn't threatened, Chambers insisted, but Cisco will protect itself above all.
"Will EMC be a good partnership for us, maybe our best? Yes. Will we compete against VMware as it relates to networking? Absolutely," Chambers told CRN. "And when we compete, we don't lose."
PUBLISHED OCT 15, 2012