FORTUNE -- Last week's disclosure that the Securities and Exchange Commission is conducting an investigation into how IBM reports its cloud computing revenue poses more questions than answers. The New York-based tech giant admitted it has been cooperating with the SEC since last May but said little else about the particulars of the case. One thing is clear: It's likely this won't be the last probe into the often inconsistent methods used to account for software-as-a-service products.
The cloud itself isn't the problem -- it's the way it happens to be packaged and sold. Unlike traditional, on-premise software, cloud-based tools are usually paid for via multi-year contracts. Customers are charged a monthly subscription fee, which means a recurring revenue stream that can be tricky to account for because it spans the course of several years (and because, sometimes, customers back out of contracts). This gets especially complicated at large companies that lump cloud-computing sales in with non-cloud products.
"Accounting rules were written when we were all trading goods with each other," says Tien Tzuo, CEO of Zuora, a billing platform used by many cloud computing companies. "As we move away from a manufacturing economy to a service economy it gets pretty complex."
IBM (IBM) may be a good example of this phenomenon. Over the past few years, the company has been shifting from its roots as a hardware and on-premise software vendor, toward a future as a cloud and services purveyor. To that end, it's made several acquisitions, including a recent $2 billion bid to acquire SoftLayer Technologies, which rents out computing power to customers.
"Any time you put two companies together, it's reasonable to expect that they will have slightly different accounting practices," says Cowen & Co. analyst Peter Goldmacher. "These are different companies with different policies and different revenue models. You've got an involved situation made complicated by taking different delivery models and accounting practices and putting them together."
That's not the only problem for companies like IBM -- and Oracle (ORCL) and SAP (SAP) -- that have made acquisitions in the cloud computing space. This clash of cultures also complicates commissions, because salespeople used to selling traditional software are used to collecting a hefty, one-time check for every deal they close. And while embracing these new, high-growth technologies are a necessary evolution for so-called legacy companies, it's not clear just how much money they're actually making from the cloud because these fledgling businesses are often bundled with other, non-cloud products. IBM, for example, has said its cloud computing business was up 70% during the first half of this year. But it hasn't given any frame of reference because it doesn't actually break out what those revenues used to be or are currently.
It will likely be a while before investors can tell exactly what these large tech companies are making from these new businesses and how well they're folding in their cloud-based acquisitions. Even cloud heavyweight Amazon.com (AMZN) isn't yet required to break out revenue from its growing cloud computing products, Amazon Web Services. According to Cowen & Co.'s Goldmacher, investors should pause before becoming too enamored with subscription-based revenue, however attractive a recurring revenue stream may seem: "... we are concerned that investors are taking false comfort in these models because the income statement and balance sheet can be lagging indicators on the real trajectory of the business," he wrote in a recent report. But Goldmacher is also quick to note that it's unlikely anything nefarious is going on, even if the SEC has reason to launch an investigation. "My belief is that this is just really complicated," says Goldmacher. "The more complicated an undertaking the more likely you are to make a mistake."
In other words, until these new cloud-computing businesses get large enough to require more transparency -- and until accounting practices for subscription-based products become more standardized at all tech companies, large and small- -- it's likely there are plenty more mistakes (and SEC investigations) ahead.
The hot enterprise firm is only now putting its software online.
FORTUNE -- You might assume that a young, fast-growing enterprise software company like Tableau Software is all about the cloud -- a.k.a. selling and distributing applications over the web. But the Seattle-based company, which started out as a Stanford University research project in 2003, is only now launching a software-as-a-service version of its business intelligence tool, Tableau Server.
In May, Tableau MOREMichal Lev-Ram, writer - Jul 18, 2013 7:01 AM ET
The growth in wearable computing could also be a new source of profits.
FORTUNE -- Intel was slow to enter the mobile market, but the chipmaker says it is now taking steps to speed up development of its Atom chip line for mobile devices. It's also rushing ahead to provide silicon (and services) to another potentially hot market: wearables, a new product category which includes connected glasses and watches.
The company's top MOREMichal Lev-Ram, writer - Jul 1, 2013 10:04 AM ET
Concern that the headwinds hitting Oracle are not cyclical but secular are growing.
By Kevin Kelleher, contributor
FORTUNE -- What do you do when you are the best company in your industry, but your industry is mired in a slump of mediocre performance?
That's the dilemma faced by Oracle (ORCL), the enterprise software giant that has long been the most feared player in the competitive market for business software. Last week, Oracle reported that MOREJun 28, 2013 10:52 AM ET
One year later, it looks that way.
FORTUNE -- It's been one year since Microsoft announced it was acquiring Yammer, a social networking tool for companies, for a whopping $1.2 billion. The plan? Use Yammer's software as a social layer across Microsoft's products and keep the smaller, San Francisco-based company as independent as possible. Twelve months in, Microsoft still has plenty of integration work ahead of it. But the Redmond-based tech giant MOREMichal Lev-Ram, writer - Jun 25, 2013 9:59 AM ET
Not only has the automaker gone through bankruptcy and restructuring, it is attempting to rebuild its technology organization.
By Doron Levin
FORTUNE -- General Motors' hiring of Randy Mott in February 2012 as the automaker's chief information officer had a lot to do, not surprisingly, with the breakdown of a crucial GM computer the year before.
Dan Akerson, GM's (GM) chief executive officer, told the Wall Street Journal in an interview that MOREJun 17, 2013 12:01 PM ET
The automaker's CIO, Randy Mott, is remaking the old-line company's technological infrastructure.
By Doron Levin, contributor
FORTUNE -- When General Motors CEO Dan Akerson tapped Randy Mott to be the automaker's chief information officer in February, 2012, he had massive changes in mind in the way GM will use and develop information technology. In July 2012, Mott announced that GM, which had relied mostly on contractors and outside vendors to deliver information MOREJun 17, 2013 11:40 AM ET
The social network wants all its employees to learn how to use data.
FORTUNE -- You may have heard of Facebook's engineering bootcamp, a six-week onboarding program for new hires to learn the ins and outs of the company's code base and culture. But over the last few months, the social networking giant has quietly rolled out another program that's not just for engineers -- rather, it's focused on teaching big data MOREMichal Lev-Ram, writer - Jun 13, 2013 7:18 AM ET
The hottest trend in enterprise technology is fueling the market.
FORTUNE --- If you hadn't heard of Tableau Software before its glamorous debut on the public market last Friday, you're not alone. The Seattle-based company makes visual analytics tools for technical and non-technical employees alike but is far from a household name. And yet, it raised around $254 million in its initial public offering and closed its first day of trading at MOREMichal Lev-Ram, writer - May 20, 2013 10:42 AM ET
Google's mobile operating system may be getting a boost from -- of all places -- Blackberry.
FORTUNE -- This week's Google I/O conference in San Francisco was disappointingly light on Android news. And it was especially light on new, enterprise-friendly features for Android devices. Instead, it showed improvements aimed at consumers and education institutions. But while Google may not seem focused on making its mobile operating system more attractive to IT departments, MOREMichal Lev-Ram, writer - May 17, 2013 9:23 AM ET
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