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What's clear is that VCE, which launched in 2009 and entered its present form in 2011, has had some success. As of the fall of 2012, the company claimed it is approaching a $1 billion run rate, and is not only closing high-profile deals -- and seeing more than 40 percent repeat customer business, according to Pavone -- but also has expanded its base of global channel partners to nearly 150.
A run rate approaching $1 billion fewer than three years into such an ambitious experiment is one of several metrics the company's true believers use to silence both its internal and external naysayers. But it's difficult to paint VCE's current financial picture with any certainty because the company has made little actual revenue data available, and what numbers are available make VCE appear to be something of a money pit.
As stated in EMC's own filings, "Our portion of VCE's gains and losses is recognized in other expense, net, in the Consolidated Income Statements." Based on the various EMC and Cisco Securities and Exchange Commission filings, EMC in fiscal 2011 invested $383.2 million in VCE -- compared with $29.6 million in 2010 and $19.2 million in 2009 -- and recognized $133.9 million in VCE revenue for the year. Its cumulative loss in VCE as of the end of its 2011 fiscal year was $253.8 million, including $209.2 million in 2011.
As for Cisco, which has a 35 percent interest in the venture, it has a cumulative investment in VCE of $392 million as of July 28, near the end of its fiscal 2012. Its share of VCE's cumulative loss as of that date is $239 million.
"Over the next 12 months, as VCE scales its operations, we expect that we will make additional investments in VCE and may incur additional losses proportionate with our share ownership," Cisco said in its latest 10-K filing with the SEC in September.
Looking at the VCE numbers as "losses," its stakeholders say, is deceptive. With VCE set up as a joint venture, Cisco and EMC both recognize revenue from sold Vblocks on their respective P&Ls, even with those noted VCE expenses. In other words, while VCE appears to be operating at a loss, the revenue gained from Vblocks is bolstering individual lines on Cisco and EMC's corporate balance sheets anyway.
But that's not a terribly enlightening metric, either. "VCE's costs show below the operations expense lines at EMC, but its revenue is shown in the top line. So the details are buried," said Jayson Noland, senior analyst at financial services firm Robert W. Baird and Co. "We're only seeing half the financial picture of VCE. The parents have to show the costs, but they don't have to show the revenue."
"I have no idea how it works on cost," said Ehud Gelblum, managing director at Morgan Stanley. "But it goes down to what is the advantage of doing that vs. buying your storage from EMC, your networking from Cisco and your virtualization from VMWare, which most of these [customers] are doing anyway. I imagine that VCE's value-add is the network design -- the extra software and the glue they put together. But it's hard to put a value on that. If you're buying this, you should be looking at VCE and then look at what [your] straight costs [are] from Cisco, from EMC, from VMware. And the VCE person selling this is very much aware he has a counterpart at Cisco, or at EMC, selling against him."
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