Tech Spending: The Great Divide
There's something puzzling going on in the computer industry. Sales of many products for businesses are plummeting, while other categories are doing quite well. Makers of powerful server computers, for instance, have seen quarterly sales drops of 20% or more. In contrast, Salesforce.com (CRM), which sells customer-management software as a service delivered over the Internet, saw revenues grow 34% last quarter, to $290 million.
The main reason for the disparity: Salesforce.com typically receives monthly checks from its customers. Companies don't have to rack up capital expenses or borrow money from tightfisted lenders to pay for computers and software. "Traditional hardware and software purchases are made through capital expenditures. That's an incredibly difficult thing to do in the current environment," says Marc Benioff, Salesforce.com's CEO. He says we're moving into "a zero-capex world." Avon Products (AVP) recently opted to use Salesforce.com's service to track 75,000 salespeople.
A great divide is opening up in the tech industry for companies that sell to businesses. Because of the severe economic downturn and credit crunch, companies such as Salesforce.com that rely on customers making purchases as an operating expense have a distinct edge over those whose customers use capital expenditures to pay for technology. The trend gives an advantage to services-oriented companies.
Outfits on the wrong end of the situation can't switch business models overnight. They're being forced to come up with ways of addressing their vulnerabilities—including, in some cases, becoming zero-interest banks for customers. Dell (DELL), for instance, recently rolled out a package of promotional financing for some server computers, including interest-free financing for certain products for up to three years. Cisco Systems (CSCO) is also offering interest-free financing for some customers on certain products.
Software companies that rely primarily on capital expenditures are making adjustments, too. German software giant SAP (SAP) has begun marketing its software in smaller, more-affordable pieces—hoping that when the economy improves customers will come back to it for more. Microsoft (MSFT) has laid out a sweeping vision of managing software for corporate customers, allowing them to rent rather than buy outright.
On the happy side of the divide are tech services companies. Accenture (ACN) and Indian tech leaders Infosys Technologies (INFY) and Tata Consultancy Services continue to see revenue growth, while IBM (IBM), with about half of its revenues coming from services, is holding up better than rival HP, which is more dependent on computer sales. IBM has another edge: its healthy balance sheet. It's able to make interest-bearing loans to customers so they can afford its high-end computers. Financing brought IBM $700 million in revenues and pretax margins of 38.2% last quarter. "Our high-end server business is strong, and I'm sure the financing business helped with some of those sales," says Jesse Green, vice-president for financial management.
The credit crunch has given rise to some surprising situations. Ruckus Wireless, a four-year-old maker of networking gear, just received its first request from a customer for a zero-interest loan so it could buy equipment. "Can you imagine?" says CEO Selina Lo. "We're a startup, and we're being asked to provide vendor financing." Ruckus has no plans to offer customers no-interest loans.