Apple Inc. is now providing its own installment plan for buying the iPhone. And customers will have an alternative to wireless carriers’ traditional subsidy and finance schemes. The iPhone Upgrade Program could be a “Big Deal,” with the potential to add up to $0.36 to EPS, according to a report from UBS. At $32.41 a month, members will be offered a brand new iPhone every year. The plan will also include Apple Care coverage.
“The result could be both higher EPS and a better multiple as iPhone revenue becomes more sustainable,” UBS analyst Steven Milunovich said. “Apple will discuss the accounting impacts on its Sep quarter earnings call.”
Milunovich cites two direct positives:
(1) Apple Inc. customers will upgrade more often, increasing revenue; and
(2) The iPhone will begin to look more like an annuity business.
Carriers May Not be Hit in the Near-Term
By paying a monthly fee, consumers can get hold of a new unlocked iPhone every year. This means that they can seamlessly switch carriers just by replacing the SIM card. Up till now, that was something very difficult. However, UBS telecom analyst John Hodulik expects the short-term impact on the top carriers to be limited.
He reckons the cost of Apple Inc. Upgrade Program is by and large in-line with the installment plans offered by the big 2 – Verizon and AT&T – when factoring in the insurance costs. T-Mobile’s and Sprint’s flagship leasing plans are however much cheaper. Moreover, the activation fees that each carrier charges should deter consumers from constantly changing service providers. Over the longer-term, Hodulik thinks Apple Inc.’s hands will be strengthened versus the carriers. iPhone users are extremely loyal, and this steady flow of recurring revenue should only improve.
A couple of years back, only about 20 percent of iPhones were sold through Apple Stores. That figure is definitely bound northwards .
Apple Upgrade Program will Bring in More Users
Overall, the impact of the iPhone upgrade program should be positive for the tech giant. “Assuming 15% of the US installed base participates in the Upgrade Program, we see an incremental 9mn iPhone units shipping in F17, contributing $0.36 to EPS or roughly 3-4% EPS growth,” Hodulik wrote. “The offset could be more used phones on the market. We estimate that there are 45-55mn secondary iPhone users, growing by 5-7mn each quarter. Although some users may choose to purchase a used rather than new phone, we believe the net effect will be positive, especially in the long run as more emerging market users join the iPhone ecosystem.”
Milunovich concludes that the Upgrade Program will improve share-holder perception of growth and consistency of iPhone revenue. This should benefit the stock.
Shares of Apple Inc. are trading around the $115-mark on Tuesday morning. UBS reaffirmed its “Buy” rating on the stock, and set a target price of $150 a share.
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