IBM Confirms SEC Probe Into Cloud Revenues

Microscope, research © kurhan, Shutterstock 2012

IBM is undergoing an official SEC investigation over how it reports its cloud revenue

IBM has confirmed that the Securities and Exchange Commission (SEC) is investigating how it reports its cloud income.

Big Blue said it is co-operating in the investigation.

IBM Confirmation

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.

IBM logo © Tomasz Bidermann Shutterstiock“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 recognise this revenue over the life of the contract. The timing of such revenue recognition can present some accounting issues.”

Routine Probe?

“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.”