By Angus Loten and Kimberly S. Johnson
As the business world's shift to cloud computing picks up steam,
technology companies face mounting pressure from regulators,
customers and investors to be more forthcoming about what they
classify as "cloud" services.
Cloud-computing companies sell shared access to software or the
processing power of their servers, which customers can use over the
Internet.
The arrangement saves clients some of the cost of running their
own information-technology department, and pay-as-you go pricing
lets them adjust computing capacity quickly as demand changes.
Trying to stand out in a hot market--Gartner Inc. expects it to
grow nearly 17% to $204 billion this year--some providers use
"cloud" in their marketing materials, sales pitches and earnings
reports to include a whole range of services, say senior technology
executives and industry analysts.
The practice, which critics call "cloudwashing," isn't new. But
as more companies consider shifting key business applications to
the cloud, they say mixing cloud with other services is confusing
and raises the risk of getting them locked into computing-services
contracts they don't want or that don't measure up to
expectations.
"Vendors are constantly showing up and trying to sell you
everything" as cloud, said Clay Johnson, chief information officer
of General Electric Co.'s GE Power & Water. He said it takes
"extra work" to determine what are and aren't "true" cloud
services, or which services will be around for the long haul. The
latter has become a growing concern as software deals stretch to
three years or more.
Under current accounting rules, tech companies have wide
latitude to define their cloud revenue. But it can be hard to see
how providers stack up if a company's earnings report might reflect
not only sales of software subscriptions, but also server parts,
and maintenance and consulting fees.
"Comparisons are difficult," Kevin Barnes, chief information
officer of plumbing-supplies company Ferguson Enterprises Inc.,
said about sizing up competing cloud services. Often, he relies on
talking with a provider's other customers to better determine how
much of a vendor's cloud tools reflect "true capabilities," he
said.
For those sifting through financial statements, understanding
sources of growth is increasingly important. "Analysts always want
more detail," said Toni Sacconaghi Jr., senior research analyst for
Bernstein. Cloud services are sometimes "nebulously defined," he
said.
Many cloud providers incorporate older tools, such as managed
hosting services, into their cloud sales numbers. Though often
referred to as "cloud," managed hosting and other off-premise
computing services don't always provide the same flexible or
scalable benefits, said Forrester Research analyst John Rymer.
Hosted services often require users to pay for a set amount of
space on a vendor's physical servers, while running business
applications they own outright or rent for a fixed rate. Public
cloud computing, by contrast, allows them to access applications as
needed and pay only for the shared resources they use, much like a
utility bill, Mr. Rymer said.
"This is happening at all levels, because organizations are
rewarded with higher multiples for cloud revenue," said Ray Wang,
founder and principal analyst at Constellation Research Inc.
Figuring out how to book revenue for cloud deals that include
hardware, software, service and maintenance is "highly complex,"
said Aftab Jamil, leader for the technology and life-sciences group
at accounting firm BDO USA LLP.
Under generally accepted accounting practices, a company must
break out a revenue source in its financial disclosures once it
reaches 10% of overall revenue, "so readers can understand those
streams," Mr. Jamil said, adding that investors prefer greater
visibility to so-called "lumpy revenue."
Amazon.com Inc. began breaking out the earnings of its Amazon
Web Services unit last April, reporting more than $7 billion in
cloud revenue at the time. That put pressure on other cloud
providers to post big numbers, analysts say. Last week, Amazon said
the sales of its cloud business rose to $2.4 billion in the most
recent quarter, up from $1.4 billion a year earlier.
Amazon declined to comment.
Microsoft Corp., its closest rival, reports cloud sales as an
annualized run rate, projecting a single quarter's sales over the
entire year, rather than disclosing the actual quarterly
figure.
On top of Azure, the company's primary cloud service,
Microsoft's cloud-business segment combines public, private and
hybrid server tools with more general enterprise services, such as
Premier Support Services and Microsoft Consulting Services. It also
includes tools that don't always run in the cloud, such as Windows
Server.
Last week, Microsoft said its cloud businesses are running at an
annual rate that is 70% higher than a year earlier.
A Microsoft spokeswoman declined to comment on the company's
cloud-revenue disclosures.
In December, Oracle Corp. posted $649 million in total cloud
revenue for the fiscal second quarter, reflecting sales from its
human-capital management cloud, enterprise-resource-management
cloud and other software- and platform-as-a-service tools. But that
figure rolled in sales from the company's
Infrastructure-as-a-service segment, which includes legacy
managed-hosting services and other revenue sources.
Oracle declined to comment on what services it includes in its
cloud-revenue disclosures.
In May 2013, the Securities and Exchange Commission launched an
investigation into how International Business Machines Corp.
accounted for cloud revenue. Although the investigation was dropped
a year later, IBM said this fall that the SEC had launched a
separate probe into its accounting treatment of certain
transactions in the U.S., U.K. and Ireland, and that it would
cooperate with the probe. The company didn't specify the types of
transactions the SEC was investigating.
An IBM spokesman declined to comment on the investigations and
directed questions to the SEC. The SEC didn't reply to requests for
comment.
In January, IBM reported $10 billion in total cloud revenue, of
which $4.5 billion was generated by "as-a-service" tools, the
company said. The rest came from unidentified software, hardware
and other services related to developing cloud systems for clients,
according to a spokeswoman.
Many analysts and investors following IBM have "discounted the
as-a-service number" in terms of revenue and price, because there's
a question if it is truly cloud or "something else in there,"
Bernstein's Mr. Sacconaghi said. "It's tricky on many fronts."
"Cloud is a growing part of our business," the IBM spokesman
said. "As it grows we're providing more clarity around what
comprises it."
Maxwell Murphy contributed to this article.
Write to Angus Loten at angus.loten@wsj.com
(END) Dow Jones Newswires
February 01, 2016 20:34 ET (01:34 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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