Storage world punch-up over whether VCE is a start-up

EMC: $40m-a-quarter losses are 'expenses'

EMC's view

An EMC view is that, SEC filings apart, VCE losses are not losses but expenses. Here's EMC's Chuck Hollis commenting on the VAR guy's blog: "I understand what you're trying to say here, but I think you've missed a fundamental 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."

There has been a sequence of comments about VCE and Vblock sales by EMC's CFO, David Goulden, and by Joe Tucci in recent EMC earnings reports. Here they are:

David Goulden in April this year:

With our expanding pipeline, VCE opened its headquarters in Dallas last month and will soon open offices in San Jose, Raleigh/Durham and London.

Given the market momentum, we are accelerating our investment in VCE ... We're increasing our projection for other expense in 2011 by approximately $70m. The accelerated VCE investment is reflected here, as are changes in the operating effects associated with VCE. However, we expect improvements to our operating margin from Vblock-related sales to effectively offset most of this increase in other expense during 2011.

David Goulden in July:

Momentum continues to build at VCE. We have seen substantial demand from small and large customers, as well as partners, who appreciate Vblock's converged, best-of-breed, virtualised infrastructure and VCE's revenue for the first half of 2011 already exceeds the revenue it achieved all of 2010.

As VCE grows, we are seeing increasing sales to repeat customers who are standardising their next-gen data centers on the Vblock and moving their enterprise workflows into full production on Vblock platforms.

Joe Tucci in July:

Our joint venture with Cisco, VCE, continues to grow in both revenue and relevance. Customer interest in the Vblock converged technology is extremely high and the installed base of Vblocks is performing very well. For sure, Vblocks are proving their value proposition and we expect Vblock sales to hit the billion-dollar run rate mark in the next several quarters."

We are left with the knowledge that EMC is asserting Vblock sales are rising steadily and there is strong customer interest. VCE is costing EMC money right now but EMC hopes and expects Vblock sales to reach billion dollar annual run rates in the "next several quarters" when it would then, obviously, be profitable.

Four quarters would take us to this time next year and we might expect profitability to be reached by then, and, possibly, unit ship numbers to be revealed or indicated.

If VCE were a Silicon Valley start-up its backers would probably never have countenanced such an ambitious infrastructure build-out and, assuming they had, would be scaling it back to stop it running out of cash.

Ironically there are rumours of VCE layoffs but these are, emphatically, rumours. Commenting on this point and saying he didn't know about that, Hollis said: "Just about every IT vendor in the industry is continually refining their labour model these days — adding and subtracting to get the right mix. To do otherwise would be foolhardy." ®

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