Wall Street fails to 'œget' cloud

Beverley Head
Friday, 17 June 2011 12:51

IT Industry - Strategy

Until Wall-Street understands the financial implications of software companies transitioning to a cloud computing model, US listed companies are in for some turbulence.

According to Carl Terrantroy, senior director of National Business Units for CA Technologies, Wall Street analysts are used to software models where sales revenue is taken up front and booked in that fiscal quarter. As companies transition to a pay as you go model, their revenue curve changes.

'This affects every US software company. Until Wall Street starts looking at other metrics, it's a challenge,' said Mr Terrantroy.

Nevertheless he acknowledged that the: 'Software industry is in transition from selling perpetual licences to pay as you go.' Eventually Mr Terrantroy expected cloud to deliver more predictability to software company revenues as the lumpiness associated with large one off deals would be smoothed out, but in the meantime the transition would be a challenge for both companies and analysts.

In May the company announced its 2011 financial results, recording a 4 per cent revenue increase to $US1.128 billion. It also reported that its fourth quarter bookings were up 31 per cent, buoyed by a five year $500 million contract renewal with an outsourcer and another 20 licence renewals, reflecting the continued dependence the company has on forward orders rather than utility pricing.

CA also reported that the average duration of subscription and maintenance bookings was 3.82 years.

Under the cloud computing model such licence renewals would fade away to be replaced by pay as you go bills. This transition to utility pricing is hard for Wall Street analysts to grasp according to Mr Terrantroy.