SEC Investigating IBM's Cloud Revenue Reporting

By Darryl K. Taft  |  Posted 2013-07-31

SEC Investigating IBM's Cloud Revenue Reporting

IBM has acknowledged that the Securities and Exchange Commission (SEC) is investigating how the company reports its cloud income and that Big Blue is cooperating in the investigation.

In the company's Form 10-Q for the second quarter of 2013 filed with the SEC, IBM said it learned of an SEC investigation into its cloud revenue reporting in May.

"In May 2013, IBM learned that the SEC is conducting an investigation into how IBM reports cloud revenue," IBM wrote in its 10-Q. "IBM is cooperating with the SEC in this matter."

In a statement in response to the news of the investigation, an IBM spokesman said, "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."

News of the investigation was first spotted on the Seeking Alpha blog, which notes that:

"No details are provided about the nature of the SEC's concerns. However, it's worth noting companies tend to receive payment for cloud software/services subscriptions up-front, and recognize this revenue over the life of the contract. The timing of such revenue recognition can present some accounting issues."

"Overall, I'd say this looks pretty routine," Charles King, principal analyst with Pund-IT, told eWEEK. "As the author notes, the complexity of services subscriptions—with deals incorporating sometimes evolving offerings often extending over several years—can result in accounting issues. So it wouldn’t be surprising to see this resolved with an agreement to correct whatever discrepancies might exist and move forward. One additional result may be that competing cloud service providers may be inspired to look at their own books. If the SEC is willing to take IBM to task, other cloud players should be looking over their shoulders."

On the earnings call regarding the company's second quarter of 2013, Mark Loughridge, IBM's senior vice president and CFO for finance and enterprise transformation, said, "Across our segments Smarter Planet was up over 25 percent, and cloud over 70 percent for the first half." Moreover, "As we move into the second half, we expect to continue our progress in areas like analytics and cloud and Smarter Planet, leverage the benefit from our workforce rebalancing activity, capture additional opportunities in cost and expense through net income, and of course, continue to return value to shareholders," Loughridge said.

Brian White, an analyst at Topeka Capital Markets, told Reuters cloud computing can include software, server, storage, network or databases used in different layers of the cloud, and not all have "clear-cut revenue recognition policies."

SEC Investigating IBM's Cloud Revenue Reporting

Meanwhile, IBM has been beefing up its cloud infrastructure technology, acquiring resources to better compete with more-established players in the cloud space, such as Amazon Web Services (AWS).

Earlier this month, IBM announced a definitive agreement to acquire CSL International, a provider of virtualization management technology for IBM's zEnterprise system. CSL is a privately held company headquartered in Herzliya Pituach, Israel. A strategic investment in the System z portfolio, the acquisition deepens the consolidation and cloud capabilities by offering simplified management of the virtualization environment.

And on the IBM Q2 2013 earnings call, Loughridge spoke of IBM's recent acquisition of SoftLayer. "Last week we closed the acquisition of SoftLayer Technologies, the world's largest privately held cloud computing infrastructure provider," he said. "As businesses add public cloud capabilities to their on-premise IT systems, they need enterprise-grade reliability, security and management. IBM has built a portfolio of high-value private, public and hybrid cloud offerings. With SoftLayer, IBM will accelerate the build-out of our public cloud infrastructure to give clients the broadest choice of cloud offerings to drive business innovation."

In June, IBM announced an agreement to acquire SoftLayer in a deal reported to be worth around $2 billion. Big Blue announced the close of the acquisition on July 8.

IBM's new cloud services division combines SoftLayer with IBM SmartCloud into a global platform. The new division, led by general manager James Comfort will provide a broad range of choices to both IBM and SoftLayer clients, ISVs, and channel and technology partners.

"Cloud computing provides a profound and transformative change in business and government," Comfort said in a statement. "With SoftLayer in IBM's portfolio, it will be easier and faster for organizations to adopt game-changing cloud services."

SoftLayer joins the more than a dozen strategic cloud acquisitions IBM has made since 2007 designed to accelerate its cloud initiatives.

IBM said its cloud revenue grew by 80 percent in 2012. Moreover, IBM officials said the company expects to reach $7 billion annually in cloud revenue by the end of 2015. Big Blue is committed to driving open cloud standards and is a key backer of the OpenStack open cloud platform.

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