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First HP Enterprise, Now Cisco Systems -- Can Delayed Payment Plans Keep the IT Industry Going?

By Anders Bylund – Apr 15, 2020 at 6:13AM

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Two IT giants are trying out an inventive way to keep equipment orders coming in during the COVID-19 crisis. Will cash-rich peers follow suit?

Networking equipment giant Cisco Systems (CSCO -1.41%) launched a $2.5 billion financing program on Tuesday. Under the so-called Business Resiliency Program (BRP), Cisco's clients have access to an order financing option with very customer-friendly terms. This is an attempt to keep orders coming in during the novel coronavirus crisis, which is shutting down entire industries as governments and business leaders navigate these uncharted waters.

But Cisco wasn't the first IT titan to come up with a financing program specifically tailored for the COVID-19 era. HP Enterprise (HPE -1.16%) led the way with a slightly different $2 billion program last week. Are these industry veterans setting a new standard for the IT sector, triggering a deluge of delayed-payment programs in the wake of the coronavirus?

Cisco's payment terms

The vendor financing arm Cisco Capital has earmarked $2.5 billion to fuel the BRP. The program is open to all of Cisco's customers, from midmarket businesses to enterprise-class giants. The first payment under this plan gets a 90-day payment holiday and 95% of the total contract can be deferred to 2021.

This relaxed payment schedule should help Cisco's clients power through any cash flow crunches resulting from the coronavirus without slowing down their networking infrastructure orders. For the record, Cisco's annual revenues stand at $51.6 billion today, so the company isn't expecting the entire client roster to take full advantage of this program.

HPE's terms

By contrast, HPE's $2 billion Payment Relief Program defers over 90% of the client's contract cost until 2021 by reducing the first 8 monthly payments to just 1% of the total order value. The monthly payments will then step up to 3.3% of the contract's value per month, which works out to a 32-month contract length.

This plan also stops far short of HPE's annual revenues, which currently add up to $28.5 billion. It's a bolder move than Cisco's in some ways, as HPE's balance sheet held just $3.2 billion of cash equivalents at the end of January. Cisco's cash reserves for the same period added up to a much beefier $27.1 billion.

Stacks of cash and a couple of separate hundred-dollar bills, all on top of a laptop computer.

Image source: Getty Images.

Who's next?

These inventive payment programs might be just what the doctor ordered to keep Cisco's and HPE's order books busy. Heading into the first earnings season of the COVID-19 pandemic era, we're about to see how far the telecoms, enterprise computing giants, and governments of the world are scaling back their IT infrastructure orders.

If these payment programs turn out to protect each company's order volume from drastic cutbacks, many IT giants could follow along with similar solutions. Cash kings like software giant Microsoft (MSFT -1.94%) and database veteran Oracle (ORCL -0.54%) -- holding cash reserves of $134 billion and $26 billion, respectively -- should be first in line. Smaller hardware-centric companies with cash balances below $5 billion might need to partner up with financial institutions to make this idea work. I'm looking at you, Cisco rival Juniper Networks (JNPR 0.04%) and storage hardware expert NetApp (NTAP -1.73%).

Trend-setters

It makes sense to see hardware specialists HPE and Cisco leading the charge here, given how difficult it is to replace one company's products with another's in their chosen target markets where a single network switch or rack server can cost $100,000 or more. The tech industry can be brutal sometimes.

The virus crisis is turning the business world upside down. Companies with the foresight and financial stability to pull this off could end up stealing market share from less-affluent competitors in the coronavirus crisis. I can only applaud HPE and Cisco for coming up with a way to take advantage of this game-changing market dynamic while also providing a valuable service to their customers.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Anders Bylund has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
CSCO
$40.00 (-1.41%) $0.57
Hewlett Packard Enterprise Company Stock Quote
Hewlett Packard Enterprise Company
HPE
$11.98 (-1.16%) $0.14
Oracle Corporation Stock Quote
Oracle Corporation
ORCL
$61.07 (-0.54%) $0.33
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$232.90 (-1.94%) $-4.60
NetApp, Inc. Stock Quote
NetApp, Inc.
NTAP
$61.85 (-1.73%) $-1.09
Juniper Networks, Inc. Stock Quote
Juniper Networks, Inc.
JNPR
$26.12 (0.04%) $0.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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