Recent news that the Securities and Exchange Commission is investigating how IBM reports its cloud computing revenues begs the question: Why are companies so coy about reporting their cloud revenues?
Basically, the answer is because they can be. Although, the SEC's most recent probe could change that, for at least some companies.
Perhaps the biggest player in the IaaS market of the cloud, Amazon Web Services, is a good example of the issue. In financial filings, the company reports revenues from its cloud computing division -- Amazon Web Services -- in a line item lumped in together with two other items, advertising services and credit card agreements. So, it's difficult to decipher exactly how much revenue is derived from AWS alone.
Ben Schachter, a financial analyst with Macquarie Capital, says as a general rule if a revenue stream does not represent more than 10% of a company's total earnings, the company does not have to report it explicitly in filings. While Schachter estimates that AWS could generate $3.8 billion in revenues this year, that's only 6% of Amazon.com's reported $61 billion in revenue from last year. "Overall, (AWS) is an interesting opportunity and certainly something to pay attention to," when it comes to Amazon.com as a broader company, Schachter says. "But it doesn't move the needle much" on the company's finances.
In the filings, Amazon.com's "other" category in the North America segment last year rose from $554 million in the second quarter of 2012 to $892 million in the second quarter of 2013, the company's most recent financial reporting period. If AWS growth outpaces that of Amazon the retailer, the company may be required to more explicitly state its AWS revenues, Schachter says.
Publicly traded companies that are focused heavily on cloud operations are not able to be as coy with their revenues. Rackspace, for example, is one of the leading competitors of AWS's cloud and is publicly traded, allowing glimpses into its cloud operations. Out of $1.3 billion in total revenues last year, just over $1 billion came from managed hosting, with about $300 million coming from public cloud revenues, according to filings. In the company's most recent quarterly earnings report, it said public cloud revenues were $64.7 million, compared to $236 million for the managed hosting division.
If analysts who track Amazon's cloud revenues are correct, that would put Amazon's most recent quarterly cloud revenues at about 10 times that size of Rackspace ($892 million for AWS compared to $64.7 million for Rackspace).
There could be another issue at play here as well. "The shift to cloud computing is dramatically changing how companies account for revenue," says Tien Tzuo, one of the first employees at Salesforce.com who became the company's CMO and now has his own startup named Zuora. Companies that have been focused on enterprise software sales usually have pretty straightforward financial reporting processes; they make a sale, collect revenue based on a license and they sell a support package.
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