How the annual iPhone Upgrade Program impacts Apple’s financials

“From an investor’s perspective, Apple‘s new iPhone Upgrade Program could be the most interesting announcement the company has made in recent months,” Steve Dee writes for Forbes. “The plan effectively helps to shorten the upgrade cycle for the iPhone, encouraging customers to upgrade every year, rather than the current estimated 2+ year cycle, while up-selling the high-margin AppleCare+ service plan. In this note, we try to size up the potential impact of the plan on Apple financials.”

“With the iPhone Upgrade Program, customers can buy an unlocked iPhone and pay for the device over a 24-month period,” Dee writes. “After every 12 months, customers will be eligible to trade in for a new iPhone, as long as they extend their agreements for another 24 months.”

“Assuming gross margins of 45+% and indirect costs equal to about 10% of gross margins, per our Apple valuation model, this would imply incremental EPS of about $0.25 in 2017, adding about 2.4% to our projected EPS for the year. While this may not seem like much, the earnings impact of the program could rise going forward as more iPhone customers sign on for the plans. So in effect, Apple would be building a pool of customers who upgrade more frequently compared to its broader user base,” Dee writes. “Additionally, our estimates are just for the United States, and Apple should eventually roll out the plan in other developed markets as well, increasing the impact… The plan helps to improve stickiness for Apple, ensuring that customers keep coming back for its latest devices.”

Read more in the full article here.

MacDailyNews Take: Apple’s plan solves a long term issue many users who’d like to upgrade annually had in the past. Of course, you could also simply buy an unlocked iPhone, sell it off each year, and apply that money to your next iPhone and so on, but this program removes the initial pain of buying the first iPhone outright, protects the iPhone with AppleCare+ coverage, eases the resale/trade-in burden, and guarantees Apple that the user’s next phone will be an iPhone.

Apple’s $32 per month annual iPhone Upgrade Program is shaking carriers to the core – September 24, 2015
Sprint offers Apple’s iPhone 6s for $1 per month with trade-in – September 24, 2015
T-Mobile trade-in plan offers iPhone 6s from $5 per month – September 23, 2015
Apple’s iPhone Upgrade Program may warrant higher earnings multiple – once Wall Street grasps what’s happened – September 15, 2015
Apple shares could rally 50% on new iPhone Upgrade Program – September 14, 2015
iPhone Upgrade Program: Apple’s brilliant strategy to turn carriers into ‘dumb pipes’ – September 11, 2015
Apple takes aim at the carriers with annual iPhone Upgrade Program – September 10, 2015
How Apple’s annual iPhone Upgrade Program works and how much it costs – September 9, 2015

[Thanks to MacDailyNews Reader “Arline M.” for the heads up.]

1 Comment

  1. Here is a point that most the bone heads on Wall Street don’t get. They are always spouting “growth” when it comes to Apple. What they are not paying attention to is that Apple doesn’t need to grow the number of users each year IF those people are upgrading more frequently.
    So in other words, Apple’s future growth in phone sells has little to do with how many new customers they convert. If their current users upgrade and do so more frequently, technically they could almost double their sells in the same two year contract period.

    Just saying…

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