Apple's iPhone Upgrade Program: What Will It Do With Used Phones -- And Other Questions Investors Are Asking

• In a report issued Wednesday, RBC Capital Markets analysts Amit Daryanani and his team look into Apple Inc. AAPL’s iPhone upgrade program.
• They wonder if the plan could “accelerate share gains & EPS.”
• The firm maintains an Outperform rating and $150.00 price target on shares of Apple.

In the research note, the analysts “outline a case where the upgrade program could add ~500bps in gross margin expansion for iPhone.” In fact, they expect the program to shorten the iPhone refresh cycle and drive a small surge in unit sales.

All Investors Need To Know

RBC’s experts assure Apple’s upgrade program will generate several tailwinds. Namely:

1) Customer stickiness will increasingly shift from carriers to Apple

2) It will oblige carriers “to be more aggressive and lower TCO of iPhone and boost install base”

3) It is expected to have a positive financial impact, although the extent of it depends on details that are not known yet

4) It will, once again, reduce the replacement cycle, which has been extending consistently, and now stands around 26 months.

Bottom line, the analysts believe that, over the short-term, the program will help boost share gains, client stickiness and competitive pricing.

What’s Known & What Isn’t

Apple’s program, financed through Citizens Bank, is a 2-year installment plan, which provides the customer with the option to re-upgrade the device after 12 months, starting a new 24-month plan. However, analysts do not know if there will be a fee involved in the process yet.

What they do know is that the program includes AppleCare and “gives the consumer an unlocked phone that in theory they could switch carriers on a monthly cadence.”

A few other details that remain unknown to date are:

• Activation charges
• Revenue recognition,
• Cost amortization
• Salvage value
• What will the company do with the used phone?

The analysts believe Apple will share some details regarding the financial implications from this program on their fourth quarter earnings call, which will take place in approximately one month.

Disclosure: Javier Hasse holds no stakes in any of the securities mentioned