IBM Defends Cloud-Computing Accounting Amid SEC Probe

International Business Machines Corp. (IBM), facing a U.S. Securities and Exchange Commission investigation into how it reports revenue from offsite cloud services, said it stands by its accounting methods.

IBM is cooperating with the SEC in the probe, which it learned about in May, it said today in a filing. The company books its revenue from cloud services, such as storing customers’ data and software applications remotely, under generally accepted accounting principles, said Ed Barbini, a spokesman for Armonk, New York-based IBM.

“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,” Barbini said.

Chief Executive Officer Ginni Rometty has identified cloud computing as one of IBM’s chief sources of growth amid a slowdown in demand for hardware and for consulting services. The investigation at the company, known for consistently meeting analysts’ earnings estimates, underscores confusion about how cloud revenue should be booked, said Michael Cusumano, a management professor at the Massachusetts Institute of Technology’s Sloan School of Management.

“This is a murky area where the rules aren’t really established,” Cusumano said. “Companies treat cloud-computing revenue in different ways.”

About half of publicly traded software companies since 1990 have had to restate revenue because of misclassification of sales and product returns, or because they categorized ongoing payments for tech-support services as a sale of a product license, Cusumano said.

‘Disciplined Process’

While IBM doesn’t disclose its revenue from cloud services, it said the sales rose 70 percent in the first half of 2013 from a year earlier. In its filing today, the company didn’t provide details on what information the SEC was seeking.

“IBM has robust systems and controls to identify and validate what products and services count as cloud revenue,” Barbini said. “IBM accounts for cloud transactions exactly the same way as it would account for those transactions if they were not cloud -- in accordance with GAAP.”

Florence Harmon, an SEC spokeswoman, declined to comment.

IBM has beat analysts’ earnings expectations in 32 of the past 33 quarters, according to data compiled by Bloomberg. On the other hand, it has missed sales estimates in seven of the past eight quarters.

More Probes?

The investigation may be the first in a series of probes into companies in the same industry as the SEC tries to clear up confusion and differences in standards, said Jack Ciesielski, owner of investment firm R.G. Associates Inc. in Baltimore and the publisher of the Analyst’s Accounting Observer.

The company has a goal of reaching $7 billion in cloud revenue by 2015, with about $3 billion from new business and the rest from current contracts shifting over to the cloud category.

IBM’s 70 percent growth rate for cloud-computing services in the first six months of 2013 was a slowdown from 80 percent last year. IBM has also said cloud revenue, which is spread across several divisions, tripled in 2011 from 2010.

IBM shares fell 1 percent to $195.04 at the close in New York. The stock has gained 1.8 percent this year.

The disclosure of the probe comes days after IBM won court approval for a $10 million settlement with the SEC for accusations of bribery in China and South Korea. IBM said earlier this year it’s the subject of a U.S. Justice Department bribery investigation related to contracts in Poland, Argentina, Bangladesh and Ukraine.

Autonomy Writedown

Hewlett-Packard Co. (HPQ), IBM’s archrival in the computer-services business, took an $8.8 billion charge last year to write down the value of Autonomy, a software company it acquired, amid allegations of accounting improprieties within the unit. Autonomy, whose products organize corporate customers’ data, had used aggressive tactics to inflate its results, a former executive told Bloomberg News last year.

Earlier this month, IBM acquired SoftLayer Technologies Inc., a cloud-computing storage provider. IBM paid almost $2 billion for Dallas-based SoftLayer, according to a person familiar with the deal.

Market researcher IDC estimates the cloud-computing market may more than double to $105 billion by 2016 from last year. SoftLayer specializes in public clouds -- data-center networks that manage computing and software for businesses remotely. IBM is pairing those capabilities with private-cloud operations, building dedicated systems for individual customers.

To contact the reporter on this story: Sarah Frier in New York at sfrier1@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net

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