IBM Corp., like Oracle Corp., is giving investors confusing information about its cloud-computing revenue, trying to show its business in the biggest, best possible light.

The most baffling part of IBM’s

IBM, +8.46%

 approach is tying its cloud business — an attempt to find revenue in new technologies — to its mainframe business, an old technology that was the biggest reason IBM managed to break a long streak of declining revenue last year. In the company’s quarterly conference call Tuesday, Chief Financial Officer Jim Kavanaugh said the slower growth rate of 6% of its cloud business in the quarter — down from 13% growth in Q3 — was due to the current slowing cycle in the mainframe business.

That appeared to be a new wrinkle in the way IBM reports its earnings and how it breaks down its cloud business. IBM gave charts in its presentation to accompany its fourth-quarter earnings call, which added a new column on page 16 in a chart that breaks down the revenue growth of its so-called strategic imperatives businesses. The new column shows growth data for these imperatives, from analytics to cloud to security, “Excluding IBM Z yr/yr.”

Read more about IBM’s fourth-quarter earnings

IBM is trying to show more growth for investors in its newer, emerging businesses that it groups under the moniker of strategic imperatives: cloud, analytics, mobile, social and security. In 2018, half of its total revenue of $79.6 billion came from strategic imperatives, which totaled $39.8 billion, a goal investors were hoping it would achieve, as opposed to more revenue coming from its legacy mainframe business.

IBM said total fourth-quarter cloud revenue of $5.7 billion grew 19%, excluding its mainframe business, the IBM Z. If the mainframe business is included, IBM’s total cloud business grew 6%.

“When you look at cloud in the quarter, the cloud number as printed really reflects the same fundamental headwind on the rap of the product cycle, the mainframe, that we had to overcome,” Kavanaugh said in response to a question on Tuesday’s call.

When asked for more information about how its cloud business is connected to its mainframe sales, IBM said that its cloud business is a bit different than other cloud companies because it has an incumbent position in the corporate data-center market, with its big installed base of mainframe customers. Customers might be running a private cloud on their own premises, using some IBM mainframe capacity, or they might be running on an IBM cloud from an IBM data center, which will also use some of its mainframe capacity.

“IBM has a lot of private cloud customers. And because of the services business, it will see more and more hybrid implementations as clients want to operate a hybrid environments,” a spokesman said.

IBM includes hardware used in creating private and hybrid clouds and its consulting and systems integration work in its cloud total revenue.

Analysts who were on the call — at least those who managed to pay attention after Kavanaugh blathered on for 43 minutes straight of prepared remarks before the Q&A — seemed to appreciate the new breakdown.

“We would have preferred IBM’s 4Q sales upside to originate within the Strategic Imperatives units,” Nomura Instinet analyst Jeffrey Kvaal wrote in a note to clients. “All is not lost however. IBM offered new disclosure that revealed the decelerating in the SI [Strategic Imperative] units stems from the completion of the z14 mainframe cycle. While only 10% of SI sales, the 40% plus decline in Z series sales weighed on SI sales quite materially.”

Forrester Research analyst Andrew Bartels, though, believes that counting services and systems integration as part of the cloud is “bit of a stretch” and that computer hardware sales to clients for cloud computing “is a real stretch.”

“IBM’s definition of cloud is pretty broad and very elastic,” Bartels, a vice president and principal analyst at Forrester, said in an email.

“IBM wants to count hardware when they want to show the size of their cloud revenues, but don’t want to count hardware when they want to show growth in cloud revenues,” Bartels said. “So, of their $5.7 billion in reported cloud revenues, I would count only $3.1 billion as really being cloud, and most of that is private cloud.”

The total $3.1 billion of true cloud revenue in the fourth quarter comes from cognitive solutions, where IBM reported $700 million in revenue for software as a service and single hosted applications, where it competes with

CRM, +0.54%

, Oracle Corp.

ORCL, +0.61%

ORCL, +0.61%

and SAP AG

SAP, +0.75%

SAP, +0.75%

and $2.4 billion from technology services and cloud platforms, where IBM has some public cloud services like Microsoft Corp.’s

MSFT, +0.97%

 Azure and’s

AMZN, +0.48%

 AWS, but it is more heavily based on private cloud services, he said.

IBM’s inclusion of hardware in its cloud data is a bit reminiscent of, but not as devious as Oracle’s  move last year to suddenly stop breaking out its cloud revenue in three different businesses. Instead, Oracle combined cloud services with license support in one category, just as its cloud revenue growth started to slow.

While buy-side analysts may have seen IBM’s move as useful information, it is confusing and reeks of a ham-handed attempt to make its newer businesses appear to be performing better than they actually are. As these legacy tech companies attempt to battle younger competitors in newer fields, investors should watch out for these kind of accounting tricks.

Get the top tech stories of the day delivered to your inbox. Subscribe to MarketWatch’s free Tech Daily newsletter. Sign up here.

Source link