Apple's Negotiating Leverage Could Help its New Services Pay Off -- Tech Check

The company has reportedly been seeking large revenue cuts for some of the new services it's expected to unveil on Monday, and also reportedly has aggressive bundling plans.

Apple's Negotiating Leverage Could Help New Services Pay Off

There are now over 1.4 billion Apple (AAPL) devices being actively used, including over 900 million iPhones. This gives Apple some valuable leverage that might help make the services it's about to launch more competitive and/or lucrative.

As many readers likely know, Apple is hosting an event at 1 P.M. Eastern Time on Monday where it's expected to unveil a slew of new services. These include a video service featuring original content financed by Apple; a service for subscribing to third-party streaming services (echoes of Amazon.com's (AMZN)  Prime Video Channels); a news and magazine subscription service integrated with the Apple News app; and an Apple Pay-branded credit card launched in partnership with Goldman Sachs (GS) .

CNBC has reported at least some of the original content Apple is financing will be provided for free to device users. Likewise, Recode has reported that for now, Apple's originals should "be considered very expensive giveaways."

On the other hand, Apple's platform for signing up for third-party streaming services, which will be baked into an app called TV and is expected to include services such as HBO, Showtime, Starz and CBS All Access, will probably have little in common with a giveaway. CNBC reports Apple has sought a 30% cut on subscriptions made through the service. For comparison, Apple typically gets a 30% first-year cut on digital content subscriptions made via the App Store, and a 15% cut for subsequent years.

Separately, The Information reports Apple could offer "bundles of on-demand streaming services for one discounted price." Along similar lines, CNBC reports Apple has negotiated bundling rights with media partners, albeit while adding it doesn't have details yet about bundle pricing. Creating bundles would provide Apple with a clear way to differentiate its offering relative to Prime Video Channels.

Meanwhile, multiple reports have indicated Apple has been demanding a 50% revenue cut for its news and magazine subscription service, which is expected to cost $10 per month. While these terms have reportedly led publishers such as The New York Times and Washington Post to stay out, The Wall Street Journal is reportedly on board, as are numerous magazine publishers.

For both the streaming subscription platform and the news/magazine service, Apple's scale acts as its ace in the hole. A number of media firms -- particularly news and magazine publishers struggling to offset nosediving print revenue streams with online subscriptions and video service providers struggling to compete in Netflix (NFLX)  and Amazon's shadow -- could reason that it's worth accepting Apple's pricing and revenue cut terms in order to be part of a service that's going to be promoted to Apple's giant installed base. Likewise, it wouldn't be surprising if Apple's scale helped it negotiate favorable terms for the credit card it plans to launch.

Just how much this negotiating leverage helps Apple boost its considerable services revenue and gross profits remains to be seen. But based on what has been reported, it definitely looks like the company put some thought into how it wants to grow and profit from its new services offerings.

Amazon.com, Apple and Goldman Sachs are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells GS, AMZN or AAPL? Learn more now.

---

Zuora's Stock Is Worth a Look Following Its Plunge

Mar 22, 2019 | 2:37 PM EDT

It's understandable that Wall Street isn't thrilled with Zuora's (ZUO) latest numbers. But given the company's growth rates, as well as how its valuation compares with that of many other fast-growing cloud software names, the 13% drop it has seen feels excessive.

Zuora, a top provider of software used by companies to manage their subscription offerings, reported fiscal fourth quarter (January quarter) revenue of $64.1 million (up 29% annually) and non-GAAP EPS of negative $0.11. Revenue topped a $62.8 million consensus, while EPS was in line. Billings (closely watched) came in at $77.9 million, beating a $76.7 million consensus.

Likely weighing on shares:

1. Using the old ASC 605 accounting rules, Zuora is guiding for April quarter revenue of $65 million to $66 million, which compares with a pre-earnings consensus of $66 million.
2. Though total revenue beat estimates, the company's subscription revenue growth decelerated to 35% from the October quarter's 43%. And for fiscal 2020 (it ends in Jan. 2020), Zuora's subscription revenue guidance implies 26% growth at the midpoint of its guidance range.
3. Zuora guided on its earnings call for fiscal 2020 (it ends in Jan. 2020) free cash flow (FCF) of negative $42 million, which is worse than fiscal 2019 FCF of negative $37 million. The company blamed $10 million worth of cash expenses related to a new headquarters.

But there are still a lot of things to like here. Such as:

1. At its midpoint, Zuora's fiscal 2020 revenue guidance of $293 million to $297.5 million (under ASC 605 rules) is above a $294.2 million consensus.
2. Zuora is maintaining its long-term target for 25% to 30% annual revenue growth, and for subscription billings to grow at a similar pace. It expects subscription billings growth to approach 30% in the April quarter.
3. Large deal activity remains strong. The number of customers with an annual contract value (ACV) at or above $100,000 was up 26% annually last quarter to 526, and the number of new deals with a value above $250,000 rose 50% in fiscal 2019 to more than 30.
4. Transaction volume for Zuora's billings software platform rose 56% last quarter to $10.8 billion.
5. Though down slightly relative to the October quarter, the company's dollar-based retention rate, defined as the amount of revenue Zuora is getting from all the customers it had a year earlier (including the ones that cancelled) was still a healthy 112%.

Zuora still has a pretty large opportunity in front of it as companies in a wide variety of industries continue embracing subscription-based business models. And as CEO Tien Tzuo mentioned in a November interview, the company still has plenty of headroom to cross-sell customers who use one of the company's two flagship software products (Zuora Billing and a revenue management solution known as RevPro) on the other offering.

Following its plunge on Friday, Zuora trades for about seven times its fiscal 2020 billings consensus. That's a much lower multiple than what many cloud software/SaaS peers are trading at, and feels reasonable for a company that could still deliver 20%-plus sales and billings growth for a while.

To see Tech Check coverage from the previous trading day, click here.