Interview with Ingemar Lanevi, Treasurer, NetApp
Transcript: Why does NetApp lease equipment? |
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Interviewer: Why does NetApp lease equipment? What’s the treasurer’s point of view; the strategy. You know: What are the real, kind of detailed advantages over buying?
Ingemar Lanevi: So, the primary, if you want to sum it down into one statement only, it really comes back to cash flow. It’s the fundamental reason for why I personally believe using leasing as a way of acquiring your technology makes the most economic sense.
It’s an asset that everybody knows it completely depreciates in value. It’s like buying a car. As soon as you drive it off the lot, you drop X percent in value. It’s pretty much the same thing with high-tech equipment.
There is a continuous evolution of technology. It gets better and faster and smarter and more efficient on a daily, monthly, yearly basis.
And cost keeps going down through the floor.
So, it clearly, to me, shows that there is a strong indication or a will, if you wish, that owning something like that really, truly doesn’t make any sense at all. Because it doesn’t retain its economic value over a longer period of time.
So, my whole premise is, why should I spend expensive capital up front to acquire that piece of plastics/metal type of thing that, again, and I know full well that in three years, four years, whatever the time frame is, it’s going to be worth less and really have no real return to me at that point in time.
Granted, I’ve gotten value out of being able to use it over its life, but I can find other ways to pay for that usage benefit by doing another alternative in terms of acquiring it, and that’s where the lease comes into play in my mind.
And if you take it one step further, if you look at how companies are being valued today by analysts and more serious investors, it’s starting, and has been for now a couple of years, driving the valuation mechanism more towards a cash flow approach.
The more we put new accounting rules in place that are non-cash in nature, the most recent one that came out was obviously the stock option expensing, which in and of itself is a complete non-cash expense that companies have to take to the GAAP accounting statements.
So when you look at an EPS number, you really are not looking at a true comparison to what really has been earned by this entity that is available for the common shareholders at the end of the day.
So, people are moving more towards a cash-flow matrix, looking at cash flow as being more of the way to value the company. And they do the same kind of matrices where they take the free cash flow per share and then do multiples on that.
And that’s how they come up with a valuation in terms of whether a company’s doing a good job or a bad job in terms of generating value to the shareholders.
And, again, if you look at the leasing transaction in itself and what that actually brings to the table with regards to free cash flow, there’s a double whammy.
There is, one, that the monthly lease payment, typically, if it’s a hardware-based solution, there is a fair market value transaction that you do on the lease. Which typically means that the residual value in the transaction is something that you, for lack of a better word, you outsource to the leasing company.
So, you don’t retain the residual risk anymore. You basically push that over to the leasing company. It’s for them to worry about: what they’re going to do with that at the end of the lease term.
And that, in and of itself, will drive a lower monthly payment versus a cash purchase where you depreciate the asset (again, presume it is the same term) over three years. The lease payment will be lower on a month-by-month basis. On an undiscounted basis, it will be lower cash flow out the door.
So that means your cash flow operations will be a higher number and therefore drive a positive cash flow impact to the cash flow analysis that I just went through.
The second piece of the puzzle is, again, since you did not have to spend the CAPEX, and the capital up front to buy the IT asset, that is the second component that goes into the free cash flow calculation.
It takes the cash flow operation, backs up the CAPEX expense for quarter, and that’s how you get the free cash flow number.
So, by not spending the capital, obviously my deduction becomes a smaller deduction and therefore, again, it pushes my free cash flow number to a higher number.
Both generating, again, significant value from a free cash flow per share metric that, again, a lot of analysts are really looking at in terms of value in a company.
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[...] performance and leasing operations. The first issue of The Lessee Advocate includes an in-depth video interview with Ingemar Lanevi, Treasurer of NetApp (NASDAQ: NTAP), and a detailed article about “How To Fix Poor [...]