Cash-Rich Microsoft Tempts Buyers With Financing Deals
Thursday October 3, 10:12 am ET
By Marcelo Prince, Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- Companies looking to jump start sales of everything from consumer electronics to automobiles to airplanes have long wooed customers with low-interest loans and financing promotions.
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Now, Microsoft Corp. (NasdaqNM:MSFT - News) is getting in on the action: lending some of its cash to help companies buy its software. The world's largest software company has quietly established a small unit, called Microsoft Capital, whose mission is to drum up business with special low-interest loans and leases.
The Redmond, Wash., company currently has three active financing programs, including two promotions for small businesses. This week it began offering up to $150,000 at 0% interest for 24 months on certain purchases. Another program - originally a $25,000 credit line for computer builders - was expanded to $150, 000 on Tuesday.
Vendor financing - where customers are allowed to buy now and pay later - is not a new marketing ploy for technology companies. Telecommunications firms and computer manufacturers have used these deals to spur sales - with mixed success. But Microsoft rarely offered customer financing until recently.
A Microsoft spokeswoman said its new financing activities are intended to " make it easier for customers to purchase Microsoft products." She declined to discuss its future financing plans or how much cash has been set aside to fund Microsoft Capital.
New Deals Mark 'Major New Strategy'
Microsoft's most ambitious foray into vendor financing was announced last month. This program lets small businesses borrow money interest-free for 90 days to purchase Microsoft software, as well as related computer hardware, technical services and non-Microsoft software.
The promotion targets customers of Microsoft's Business Solutions division, which sells the recently acquired Great Plains and Navision products. The minimum loan is $10,000 and there's no maximum.
"If the customer is creditworthy we will do the deal. We've gotten applications over $1 million, but the average is about $100,000," says Jeff Edwards, director of product management at the Business Solutions division.
Banks are often hesitant to finance software purchases or technical services because, unlike homes or cars, they have little residual value and there is nothing to repossess if the loan sours.
By balancing the margins Microsoft makes on its software with the cost of the financing offer, Edwards says Microsoft can manage its risks and cover the cost of its capital even with zero-interest offers. "It's a major new strategy for us," he says.
Microsoft has recently introduced other financing programs. This week it began extending credit lines up to $150,000 to small U.S. companies that build and sell computers with Microsoft software.
The program, introduced in April 2001 as Microsoft prepared for the launch of Windows XP, lets computer builders borrow money to purchase Microsoft software, which they would install on computers sold to customers.
On Tuesday it also unveiled a financing offer for small- and medium-sized businesses. It lets businesses borrow up to $150,000 with 0% interest for 24 months if they purchase Microsoft software, like Windows or Office, under its Open volume licensing program and enroll in its Software Assurance upgrade program.
Financing Could Boost Sales
These generous offers may be an attempt to boost software sales at a time when PC shipments are weak and spending on new technology remains depressed, analysts say. They also come at a time when Microsoft has made a concerted push into the small-business market, where financing deals are more common.
These tailored programs account for a fraction of Microsoft's current business. "It's not like they are going to finance PCs for the world," says Rick Sherlund, software analyst at Goldman Sachs. He recommends purchase of Microsoft shares and doesn't own the stock. "This is an effort to facilitate the purchase of Microsoft software for the small- and mid-sized company market."
The push into the financing business is also an effort by the software giant to find a use for its more than $50 billion in cash and equivalents, something investors and analysts have called upon the company to do.
Despite potential bad debt risks, a financing program is a profitable way for Microsoft to deploy some of its cash, analysts say. More importantly, vendor financing could help Microsoft compete with the likes of International Business Machines Corp. (NYSE:IBM - News) , which has used financing extensively to sell a broad range of products and services.
"Financing has proved an important tool for IBM," wrote George Gilbert, software analyst at Credit Suisse First Boston, in an August research report. Gilbert rates Microsoft stock at outperform and doesn't own the shares. "With financing (Microsoft) could offer end-to-end solutions through its partners and pioneer a new channel for small and medium enterprises."
Lends Own Cash, Takes On Risks
Microsoft is entering the financing business at a time when others are exiting it or have had to take large charges for bad debt expenses. Xerox Corp. (NYSE:XRX - News) , a big provider of equipment financing, is outsourcing its financing program to lighten its debt load and reduce risk. Companies like Tyco International Ltd. (NYSE:TYC - News) and General Electric Co. (NYSE:GE - News) have come under scrutiny because of their complex financing arms.
While Microsoft has an enviable balance sheet, it is assuming risks by lending out its money. It has taken steps to mitigate potential liabilities. It has hired a handful of former bankers to run Microsoft Capital under the direction of Chief Financial Officer John Connors, one analyst said. Microsoft will focus on financing software purchases and avoid unrelated markets. It has partnered with Household International Inc. (NYSE:HI - News) , a large provider of consumer loans and credit cards, to screen applicants, make credit decisions and handle customer billing.
Vendor financing is not entirely unknown in the software business - many companies let customers stretch out payments or lease products. For example, Oracle Corp. sold 14% of its software licenses through its financing division last quarter. But Oracle and most other vendors typically sell their loans to banks. Microsoft is putting its own money on the line.
Analysts aren't overly concerned. In addition to more than $50 billion in its treasury, Microsoft generates about $1 billion in free cash flow every month, notes Goldman's Sherlund. "I would not suspect they would have to dip into their existing cash balance" to fund these programs, he says.
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