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A Case Study in Technology Refresh Leasing

Deal Review
An existing customer in the accounting/consulting services industry required financing services in support of their Voice over Internet Protocol (VoIP) technology rollout based on incremental equipment installations through June 2009 for numerous sites across the United States. Total value of the financed equipment over the term of the project will exceed $7M.

Background:
The clients’ current voice infrastructure consists of Avaya PBX phone systems located in all their US locations. Their goal is to migrate their voice traffic onto their data network utilizing VOIP technology supplied by Cisco Systems. The business justification for this project is to lower telecom costs, lower operational costs by managing one network and one vendor, and lower incremental equipment costs over the long run.

The customer traditionally leases all their IT/Network assets as they allocate their capital on more strategic initiatives that have a higher return on investment (ROI) then the ROI associated with owning their IT/Network assets. The problem that the client has experienced with leasing is that they do not manage their IT/Network assets efficiently, thus incurring exorbitant expenses when failing to meet end of the lease terminations. Based on their history of mismanaging assets coupled with their desire to continue leasing their technology assets, the customer issued a leasing RFP with the following requirements:

  1. Competitive Lease Pricing
  2. Best-in-Class Asset Tracking
  3. Lease Documentation and Billing Per Location/Site
  4. Favorable Terms and Conditions: Flexibility to Accomplish Unanticipated Hardware Upgrades/Downgrades, moves, adds, changes
  5. Ability to Procure Competitive Hardware Upgrades/Enhancements During the Lease
  6. Flexibility at Lease Termination in Regard to Competitive Lease Extensions, Equipment Buy Outs, and Partial Equipment Returns

Through our ability to understand the customer’s issues, our firm grasp of Cisco Technology and the marketplace (new equipment pricing, residual values, remarketing expertise, etc.) and our financial structuring capabilities, N-1 Technologies was able to offer our customer a unique solution utilizing N-1 Technology Refresh Program.

Technology Refresh Program

  1. Competitive lease rates vs. traditional operating leases the customer typically used in the past.
  2. End of term buy-outs and extensions are “capped” so the customer understands, up front, their all-in cost should they decide to keep the equipment beyond the original term.
  3. Remarketing Sharing Agreement. If and when equipment is returned during the lease, N-1 Technologies will be responsible for remarketing the equipment and will share the net proceeds with the customer. This allows the client to participate in the residual value of the equipment thus lowering their overall cost to utilize the assets. N-1 Technologies serves as the client’s equipment manager advising them on market conditions to maximize the value of their portfolio of assets.
  4. Since there are no penalties to keep the equipment past the original term, the customer does not have to incur the costs of employing extra staff to track, maintain and return all the equipment in pristine condition. They can now manage to the lifecycle of the technology and not to the end of a lease.

Benefits to the Technology Refresh Program

  1. If the customer decides to keep the equipment for any reason, they know their all-in costs upfront thereby eliminating the uncertainty of equipment values at the end of term while avoiding excessive lease-extension fees.
  2. They can return any or all the equipment in any condition:
    1. Equipment returned earlier is worth more
    2. The better the condition of the equipment the more the economic recapture.
    3. Flexibility – the customer is not required to return all the equipment; however, the more returned, the larger the remarketing proceeds.
  3. No month month-to-month rental payments – the customer does not need to return equipment at the end of term because they “own” the assets.
  4. No charge for missing items. N-1 will sell only what it receives. The more assets returned, the lower the overall cost is for the customer.
  5. There is no charge for damaged items. N-1 will sell the returned equipment “as-is”, the better the condition, the higher the value.
  6. Easier and less expensive to administer a technology refresh program vs. a traditional operating lease. Do not have to be 100% correct on the timing. Do not have to manage to the end of the lease terminations. No more “tail wagging the dog”!

Case Studies