EMC loses half a BEEELLION on VCE ... but it's NOT what it seems

Comment EMC has lost a cool half billion dollars on VCE, the converged server-storage-networking biz it founded with Cisco, VMware and Intel.

VCE makes vBlocks, bundled Cisco servers and switches, EMC storage and VMware's hypervisor, which are packaged as single systems instead of four separate components: thus being much easier to buy, install and operate than equivalent systems built from separate components.

Stifel Nicolaus analyst Aaron Rakers has been looking at an EMC 10-K SEC filing for 2012 and writes:

EMC has invested a cumulative $676.1 million in the VCE joint venture since its inception in 2009, as well as $13.9 million in stock-based compensation – totalling $690 million. EMC continues to own 58 per cent of VCE’s outstanding equity … EMC’s consolidated share of losses was approximately 63.2 per cent in 2012 (vs. ~63.2 per cent 2011 and 58 per cent in 2011). EMC’s accumulated net losses from VCE have totalled $498.2 million.

That's near enough a half billion dollars. As for VCE as a whole, Rakers writes:

"This would imply total VCE losses at approximately $387.5 million in 2012, up from $331 million implied total VCE losses in 2011."

He says EMC recognised about $285.8 million in total sales from products and services to VCE in 2012 (vs. $133.9M in 2011). EMC and Cisco recently announced that the VCE partnership has reached $1 billion in annualised demand (or bookings).

EMC's 10-K says:

The losses recognised from the joint venture exclude our consolidated revenues and gross margins from sales of products and services to VCE, and any additional related selling expenses.

And further:

Our 2012 other income (expense), net primarily consists of our consolidated share of the losses from our converged infrastructure joint venture, VCE Company LLC, of $244.9 [million] ...

So $285.8m sales to VCE and $244.9m losses from VCE in 2012, making a net $40.9m profit or surplus. Unless our accounting math and understanding is way off-beam, VCE - cumulative losses not withstanding - looks a good business for EMC. ®