Imminent death of VCE will be no surprise to Wall Street
Cisco and EMC shareholders have suffered a combined net accumulated loss from VCE of a mere -$607.3 million on a combined investment of only $1.063 billion.
In his research note today, RBC Capital Markets Managing Director, Mark Sue, stated the following bombshell:
"Considering the changing alliances in large cap tech, we wouldn't be surprised if the Cisco, EMC, and VMware partnership, VCE, is soon shuttered."
Sue added:
"We expect VCE, of which Cisco owns 35%, may do ~$1B in annual bookings. When a friendship ends...find a new friend. VMware and EMC were once considered Cisco's BFFs but things started to sour with VMware's acquisition of Nicira and their intent to grab a share of the $20B switch market (Cisco has
~65% share). Cisco in return is going after VMware and unveiled its own OpenStack software and will up the ante with a major partnership with Citrix, VMware's major competitor."
According to Cisco's most recent 10-K filing (page 73) with the U.S. Securities and Exchange Commission:
"VCE is a joint venture that we formed in fiscal 2010 with EMC Corporation (EMC), with investments from VMware, Inc. (VMware) and Intel Corporation. VCE helps organizations leverage best-in-class technologies and disciplines from Cisco, EMC, and VMware to enable the transformation to cloud computing.
"As of July 28, 2012, our cumulative gross investment in VCE was approximately $392 million, inclusive of accrued interest, and our ownership percentage was approximately 35%. During fiscal 2012, we invested approximately $276 million in VCE.
"We account for our investment in VCE under the equity method and our portion of VCE's net loss is recognized in other income, net. As of July 28, 2012, we have recorded cumulative losses since inceptions from VCE of $239 million. Our carrying value in VCE as of July 28, 2012 was $153 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. From time to time, EMC and Cisco may enter into guarantee agreements on behalf of VCE to indemnify third parties, such as customers, for monetary damages. Such guarantees were not material as of July 28, 2012."
And according to EMC's most recent 10-Q filing (page 11) with the U.S. Securities and Exchange Commission:
"In 2009, Cisco and EMC formed VCE Company LLC (VCE). VMware and Intel are also investors in VCE. VCE, through Vblock infrastructure platforms, delivers an integrated IT offering that combines network, computing, storage, management, security and virtualization technologies for converged infrastructures and cloud based computing models. As of June 30, 2012, we have contributed $548.0 million in funding and $12.4 million in stock-based compensation to VCE since inception and own approximately 58% of VCE's outstanding equity. In July 2012, we funded VCE an additional $111.0 million.
"We consider VCE a variable interest entity. Authoritative guidance related to variable interest entities states that the primary beneficiary of a variable interest entity must have both of the following characteristics: (a) the power to direct the activities of a variable interest entity that most significantly will impact the entity's economic performance; and (b) the obligation to absorb losses that could be potentially significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. Since the power to direct the activities of VCE which most significantly impact its economic performance are determined by its board of directors, which is comprised of equal representation of EMC and Cisco, and all significant decisions require the approval of the minority shareholders, we have determined we are not the primary beneficiary, and as such we account for the investment under the equity method.
"Our portion of VCE's gains and losses is recognized in other income (expense), net, in the consolidated income statements. Our consolidated share of VCE's losses, based upon our portion of the overall funding, was approximately 63.2% for the three and six months ended June 30, 2012 and 2011. As of June 30, 2012, we have recorded net accumulated losses from VCE of $368.3 million since inception, of which $59.5 million and $115.0 million were recorded in the three and six months ended June 30, 2012, respectively, and $46.6 million and $88.4 million were recorded in the three and six months ended June 30, 2011, respectively.
"We recognized $72.4 million and $22.2 million in revenue from sales of product and services to VCE during the three months ended June 30, 2012 and 2011, respectively, and $141.0 million and $44.5 million for the six months ended June 30, 2012 and 2011, respectively. We perform certain administrative services, pursuant to an administrative services agreement, on behalf of VCE and we pay certain operating expenses on behalf of VCE. Accordingly, we have a receivable from VCE related to the administrative services agreement of $25.6 million and $27.0 million as of June 30, 2012 and December 31, 2011, respectively, which is included in other current assets in the consolidated balance sheets."
Cisco and EMC shareholders have suffered a combined net accumulated loss from VCE of a mere -$607.3 million on a combined investment of only $1.063 billion.
So obviously both Cisco's and EMC's shareholders will be forlorn with mourning over the death of VCE.
