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EMC takes control of VCE, Tucci willing to delay retirement

EMC, under pressure to spin off assets or merge with another large company, today spun in one of its assets – its VCE joint venture with Cisco.

EMC CEO and chairman Joe Tucci would not comment on any other possible M&A strategy during EMC’s earnings report call. Hewlett-Packard executives have claimed the two companies held merger talks before HP split its company in two. Tucci said EMC’s policy is to not comments on speculation rumors.

He did say he agreed with investor Elliott Management that EMC’s stock is undervalued. Elliott is pushing for EMC to spin off assets. Tucci called the stock performance “painful” and “baffling” and said it does not reflect EMC’s growth in recent years. When asked if EMC would give any updates on possible mergers or sales, he said, “I believe we owe investors an update. We will do that early in the new year.”

Tucci’s contract expires next February, and that has been a catalyst for much of the merger and spinoff talk. But Tucci today said he is open to staying beyond that date in his current role or as chairman only. But not for long.

“You should view February of 2015 as a guidepost, not a definitive date,” he said. “I told the board, ‘If you have a [replacement] and want to move earlier, that’s fine.’ Or if you want me to stay a little longer – I’m not talking years, but months or quarters — that’s fine. Or if you want me to stay on in a chairman role, I would contemplate that favorably.’”

Tucci certainly didn’t sound like he favored spinning out VMware or any EMC asset. He said methods of raising stockholder value through spinoffs and stock buybacks “aren’t strategies, they’re tactics. You need to build a strategy. We’ve invested in a strategy. We have some great assets, and these are going to pay off big time.”

EMC reports revenue for all of its companies, including independently run VMware, Pivotal and EMC Information Infrastructure (EMC II). EMC II is the main storage group within the EMC federation.

EMC II reported revenue of $4.5 billion, which was up six percent from last year. Tucci and EMC II CEO David Goulden said emerging technologies such as XtremIO flash arrays and ViPR and ScaleIO software-defined storage fueled much of the growth, along with midrange VNX arrays and Data Domain backup appliances.

VCE will move under the EMC II umbrella, with Cisco reducing its stake in the joint venture from 35 percent to 10 percent. The move comes after weeks of rumors that Cisco would pull out or greatly reduce its role in the money-losing company that was created in 2009.

VCE sells Vblocks, which are pre-tested bundles of EMC storage, Cisco server and networking products, and VMware software. EMC claims VCE has more than a $2 billion run rate for VCE revenue, which means it sold more than $500 million worth of products last quarter. EMC also claims more than 2,000 Vblocks have been sold since VCE began.</

Although an EMC blog today hailed VCE as “The most successful joint venture in IT history,” it has been a money loser for the partners.

According to a report published by financial analyst Aaron Rakers of Stifel, EMC and Cisco suffered more than $1.6 billion in combined operating losses from the joint venture through July. With a 35 percent equity stake, Cisco’s share of the losses would be $644 million. Cisco decreased its VCE investment to $10 million in the quarter that ended last April compared to $91 million the previous quarter. VCE partners have invested a combined $1.988 billion in the joint venture with more than $700 million coming from Cisco, according to Rakers.

Cisco has maintained partnerships with EMC competitors over the life of VCE, including reference architectures with NetApp (FlexPod) and Nimble Storage (SmartStacks).

Goulden said Vblocks will continue to exclusively use EMC, Cisco and VMware technology. VCE’s 2,000 employees will join EMC.

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