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SEC Investigates IBM Cloud Revenue Reporting

Jul 31, 2013 (09:07 AM EDT)

Read the Original Article at http://www.informationweek.com/news/showArticle.jhtml?articleID=240159237


IBM divulged on Wednesday in a regulatory filing that it learned in May that the Securities and Exchange Commission (SEC) is investigating how the company reports cloud revenue. The company said it is cooperating with the SEC and it expressed confidence in its accounting methods.

"IBM's reporting of cloud revenue is the result of a rigorous and disciplined process, and we are confident that the information we have provided has been consistently accurate," IBM spokesperson Ed Barbini told Bloomberg.

The investigation is interesting in that IBM doesn't formally break out cloud-computing revenue in its quarterly and annual filings, a lack of transparency that InformationWeek has criticized given the growing importance of cloud services.

In mid-June, IBM reported, along with its second-quarter financial results, that cloud-related sales rose 70% in the first half of 2013 from a year earlier, but it did not provide actual sales figures. IBM has publically said that it expects cloud revenue to reach $7 billion by the end of 2015.

According to confidential internal documents recently obtained by InformationWeek, IBM's cloud revenues totaled $2.26 billion in fiscal year 2012. That means the company has a $4.74 billion gap to close in order to reach its $7 billion goal within two and a half years.

[ Want more on IBM's most recent cloud deal? Read IBM Puts SoftLayer At New Cloud Unit's Core. ]

IBM is clearly accelerating investment in cloud computing. In early June, IBM paid $2 billion to acquire SoftLayer, a privately held cloud-computing infrastructure company that had $364 million in revenue in 2012, according to Moody's.

IBM did not disclose exactly what information the SEC is after, but the boundaries between tech-support services and product license revenues can easily get murky.

"About half of publicly traded software companies since 1990 have had to restate revenue," Michael Cusumano, a management professor at the Massachusetts Institute of Technology's Sloan School of Management, told Bloomberg. The problems usually stem from the misclassification of sales or improperly categorizing tech-support services payments as sales of product licenses.

With the pressure on public companies to satisfy investors that they are gaining in important growth markets such as cloud computing, there are clearly temptations to recast existing on-premises business as cloud-related revenue. Many of IBM's services contracts, for example, are being shifted to the cloud category. Just what is cloud? It's clear that from a financial reporting perspective, the boundaries between cloud services and conventional license sales are still being worked out.