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EMC Q3 Misses Estimates, Buys Out Joint Venture With Cisco

A growing rift over the future of networking.

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Data storage company EMC missed Wall Street’s expectations on its third-quarter earnings and trimmed its profit forecast for the year, joining the chorus of enterprise tech companies citing the effects of a stronger dollar versus global currencies eating into their profit margins.

The performance also highlighted the pressure the company has faced from activist investor Elliott Management, which argued earlier this month that the company should break up and sell off its stake in another one of its units, VMware.

EMC’s shares rose slightly in pre-market trading. It also announced it will buy out most of Cisco Systems’ stake in a joint venture company called VCE, with Cisco retaining a 10 percent ownership stake.

Launched in 2009, VCE sells data center equipment that melds computing, storage, networking and virtualization into a single product. VCE was on track to post about $2 billion in revenue this year and it has about 1,000 customers, according to the press release.

EMC had invested about $1.1 billion in VCE for a 58 percent stake, according to regulatory filings. As of the end of last year, it had recorded a combined net loss of $796 million over three years.

The timing of the change at VCE is interesting. Cisco has a few logical reasons for wanting out. It has been annoyed with VMware — also a founding investor in VCE — ever since it acquired the software-defined networking startup Nicira in 2012. Essentially, by getting into the SDN business, VMware was seeking to compete with Cisco.

Software-defined networking is a nascent business that’s said to represent the future of networking. Typically, most of the brains of networking equipment — Cisco’s bread and butter — lies in specially designed hardware. Cisco designs super-custom chips called ASICs that lie at the heart of its routers and switches.

The idea behind SDN is to put all the networking brains into software and run that software on commodity hardware. That means that if you need to make a big change in how your network runs, you only need to change the software, and not swap out the hardware. Cisco has its own ideas about SDN, and it’s going in a different direction from VMware. What that means is these partners are now competitors.

EMC already has an unusual portfolio structure of companies, and adding VCE into its mix that already includes VMware, RSA Security and Pivotal is sure to spark comments from Elliot. Time is also ticking away on the management succession clock as CEO Joe Tucci (pictured) is expected to retire early next year, though he has delayed his retirement plans before.

Over the summer, EMC was the subject of a potential merger with Hewlett-Packard. The two had contemplated a “merger of equals” in what would have created a truly massive computing and IT giant. The companies couldn’t come to an agreement on how to value EMC. HP was mostly interested in getting its hands on VMware, and the talks formally ended just before HP announced its own plan to split in two.

EMC posted a profit of 44 cents a share on sales of $6 billion for the quarter. The profit was two cents below what analysts had called for. Sales rose nine percent.

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