Apple Disputes Goldman Sachs Analyst Report Claiming Free Year of Apple TV+ Will Impact Earnings

Friday September 13, 2019 12:22 pm PDT by Juli Clover
Goldman Sachs this morning cut its target price for Apple's stock from $187 a share to $165 a share, claiming Apple's plans to give away free access to its upcoming Apple TV+ service will cause a "material negative impact" on earnings because of how the accounting for the service will work.


Goldman Sachs' Rod Hall said that Apple would account for the one-year free trial as a combined hardware and services bundle discount, which would show lower hardware profit margins.
"We believe that Apple plans to account for its 1-year trial for TV+ as a ~$60 discount to a combined hardware and services bundle," wrote Goldman analyst Rod Hall, in a note.

"Effectively, Apple's method of accounting moves revenue from hardware to Services even though customers do not perceive themselves to be paying for TV+. Though this might appear convenient for Apple's services revenue line it is equally inconvenient for both apparent hardware ASPs and margins in high sales quarters like the upcoming FQ1′20 to December," Hall added.
Apple in a statement to CNBC disputed Goldman Sachs' negative call and said that it does not expect the introduction of ‌Apple TV‌+ to have an impact on its financial results.
"We do not expect the introduction of ‌Apple TV‌+, including the accounting treatment for the service, to have a material impact on our financial results," the company said in a statement to CNBC.
Apple is planning to provide one free year of ‌Apple TV‌+ access to all customers who purchase an iPhone, iPad, iPod touch, ‌Apple TV‌, or Mac, aka any device able to play the service's TV shows and movies.

For those who do not get ‌Apple TV‌+ for free through a device purchase, Apple is charging $4.99 per month for the entire family. ‌Apple TV‌+ is set to launch on Friday, November 1.

Tag: AAPL
[ 195 comments ]

Top Rated Comments

(View all)

Avatar
rkRusty
22 weeks ago
Apple Card, now brought to you by JP Morgan.
Rating: 51 Votes
Avatar
Solomani
22 weeks ago
That analyst is clueless. He has no idea how powerful, how entrapping and addicting the Apple Ecosystem is. Once Apple customers get sucked into the Apple Ecosystem, it's very difficult to bail out. And often it starts with a Free Trial. Remember all the clueless analysts that said Apple Music would fail? That it would never ever compete or catch up to Spotify etc? LOL

Apple Music also started with free trials.
Rating: 44 Votes
Avatar
telepheedian
22 weeks ago
I know that Goldman Sachs' credit card division is a very different part of the company than the investment banking analysts' division, but this sure is awkward.
Rating: 32 Votes
Avatar
gugy
22 weeks ago
This was a smart move by Apple. If their content is indeed great, people will have time to get used to it and eventually keep it in the long run.

I am hoping Apple at some point creates a master subscription plan that includes all their services and iCloud storage at a fair price for individuals and families. That might entice me jumping into other services that at this point I don't care about it.
Rating: 30 Votes
Avatar
TheRealTVGuy
22 weeks ago
Further proof that what's good for the shareholders isn't necessarily the same as what's good for the customers.

Buuuut when your executive teams' bonuses are tied to shares of stock (and their value), is it any wonder the kinds of decisions we see?
Rating: 20 Votes
Avatar
OceanMindedBoy
22 weeks ago
Is that analyst on crack or something? Giving people the chance to experience Apple TV+ for free for a year will return in greater profits.
Rating: 20 Votes
Avatar
janitorC7
22 weeks ago

This large financial entities should screen their analysts opinions before letting them out to the public.
These narrow minded and cheap analysts are out of control.

A free year of AppleTV+ Is the best advertising campaign Apple could have chosen.
Encourages people to buy Apple products just to get the freebie, and also gives them a chance to try it and become addicted to it.


It's not that often that my professional expertise is relevant on this forum but, let me offer some insight into what is going on here - Revenue Recognition, Bundles, and Multi-Element Arrangements.

To the customer, the service is being offered as free however from an accounting perspective Apple is combining two products into a single hardware + software revenue contract where one of the products is being discounted at 100%. Since this product has standalone value (something called SSP under ASC 606) Apple needs to apply an accounting policy that appropriately estimates how much recurring revenue uplift they will receive from people continuing to use AppleTV+ after the free trial..

What the analyst is concerned about is Apple taking the full $60 and moving it from hardware to services and overstating how much of their revenue growth is coming from selling new services (analysts prefer subscription services growth since it's recurring - so this number accelerating is beneficial to a company).

What is important to note here is that in Jan 2018 the way that every public company reports their revenue numbers changed under new regulation known as ASC 606. Companies, analysts, and auditors still have different opinions on how the principals of this new standard should be applied so disagreements like this have been really common over the past year and will continue to be for a few years. To put it another way.. the bugs are still being worked out with how companies recognize revenue.

Here are some good articles for people who would like more information:

https://www.accountingtoday.com/opinion/welcome-to-year-one-of-asc-606

https://www.investors.com/news/technology/top-line-turmoil-booking-revenue-faster-could-shake-up-earnings/

https://www.accountingtoday.com/news/asc-606-or-666-software-companies-could-face-trouble-from-fasbs-revenue-recognition-standard
Rating: 16 Votes
Avatar
ricktat
22 weeks ago
For the next 12 months the service isn't worth $1.99 a month with the content.

Maybe next year they can be worth $4.99
Rating: 12 Votes
Avatar
egodspeed
22 weeks ago
Such a strange professional relationship Goldman and Apple have.

Goldman: We back the Apple Card. Get it.
ALSO Goldman: Cuts the Apple stock target price. Don't get it.
Rating: 9 Votes
Avatar
falainber
22 weeks ago

That analyst is clueless. He has no idea how powerful, how entrapping and addicting the Apple Ecosystem is. Once Apple customers get sucked into the Apple Ecosystem, it's very difficult to bail out. And often it starts with a Free Trial. Remember all the clueless analysts that said Apple Music would fail? That it would never ever compete or catch up to Spotify etc? LOL

Apple Music also started with free trials.

You definitely have no clue about any of it. The analyst simply stated how this development would affect the accounting (and EPS as a result). This has nothing to do with ecosystem or Spotify or whatever.
Rating: 9 Votes

[ Read All Comments ]