Analysts: Sprint's iPhone leasing plan to boost earnings, while Verizon's Edge changes will help against AT&T

Sprint's (NYSE: S) "iPhone for Life" leasing program for new iPhones should boost the carrier's EBITDA and is actually more financially beneficial to the company in some respects than more conventional equipment installment programs, according to financial analysts. Meanwhile, Verizon Wireless' (NYSE: VZ) recently confirmed changes to its own Edge handset upgrade program should help it close the gap financially and competitively with AT&T Mobility (NYSE: T), according to analysts from Jefferies.

The latest moves by the carriers--including a new loyalty credit to customers on legacy Sprint plans who use the iPhone leasing program--come as the carriers are trying to take advantage of Apple's iPhone 6 and 6 Plus launch. Additionally, carriers are trying to balance new smartphone sales while maintaining their finances as more customers switch away from the traditional U.S. model of getting a subsidized device in exchange for a two-year contract.

Under Sprint's iPhone for Life program, individual customers pay $20 per month for a 16 GB iPhone 6, instead of $30 under normal financing. The 16 GB iPhone 6 Plus costs $25 per month under this program instead of $35 under normal financing. If a customer wants an iPhone with more internal storage they will pay more per month. The leasing program applies to families as well. Customers pay the monthly leasing fee on top of their Sprint service plan, and Sprint is offering a $50 unlimited plan to customers who buy a new iPhone and finance their phone.

After 24 months customers can turn in their existing leased iPhone 6 or iPhone 6 Plus and lease another phone with zero down at signing; purchase the leased iPhone 6 or 6 Plus; continue leasing the phone on a month-to-month basis; or, when the lease ends the customer can return the device in good working condition and terminate their service.

In a research note, Jefferies analysts Mike McCormack, Scott Goldman and Tudor Mustata wrote that like traditional equipment installment plans, in which customers pay off the cost of their devices in monthly installments and can upgrade early, Sprint's iPhone leasing program boosts EBITDA at the point of sale compared with existing postpaid plans.

However, because no imputed interest is booked, the benefit is greater, the analysts note. Over the 24 months of the lease, the plan offers a larger EBITDA benefit than postpaid plans and EIP plans because the entire customer payment is booked as high-margin revenue. And unlike postpaid plans, where the entire monthly payment is recorded as service revenue, under the Sprint iPhone program payments are classified as equipment leasing revenue.

The analysts added though that given the lower service plan pricing, ARPU and service revenue at Sprint will likely be negatively impacted. Yet the analysts also said the overall cash flow impact of the iPhone program is "very similar" to EIP over 24 months.

Under a new promotion, which runs through Jan. 15, Sprint is offering a $15 monthly service credit that drops the cost of leasing an iPhone 6 down to $5 per month and an iPhone 6 Plus down to $10 per month. However, the credit is only available to customers who stick with their legacy rate plans and not the new $50 plan. Thus, as Re/code recently pointed out, it is probably a better deal for Sprint customers to take the $50 plan and the higher financing cost and forego the service credit.

For Sprint, the credit and promotion will likely be a wash or a slight benefit financially, the Jefferies analysts added. "We highlight that while the price cut seems aggressive, existing customers must be on legacy plans that typically cost ~$80 and higher per month already, implying a same or better cash flow profile than if the customer switched to the new $60 Unlimited and received the $20 iPFL plan," they wrote. "The offer is roughly equivalent to historic upgrade promotions over 24 months, but Sprint gets to keep the device."

Meanwhile, Verizon confirmed it is increasing the number of monthly payments customers must make from 20 months to 24 months, which should lead to a decrease in how much customers pay per month in device financing. However, customers must now pay off 75 percent of the balance on their current phone to upgrade to a new phone--Verizon previously only required customers to pay off 60 percent of the balance of their phone. 

Verizon also tweaked its service plan pricing for Edge customers. Customers on Verizon's More Everything shared data plans with data ranging from 500 MB to 8 GB plans will now receive a $15 per line discount when they use Edge (it had been $10 previously), and plans of 8 GB or more will get a $25 discount per line when customers use Edge, which is unchanged.

The changes should benefit Verizon's financials, the analysts wrote. "The change would reduce the monthly device cost for consumers (e.g. by more than $5 for a 16 GB iPhone 6) and would match AT&T's popular Next-18 EIP plan," they wrote. "While cash is repaid at a slower pace to Verizon, the expected recorded loss on the device at point of sale is likely lower, benefiting EBITDA."

When combined with its new, lower monthly Edge payment, the analysts added, Verizon's plans are now only around $10 more expensive than AT&T's plans below 10 GB per month--and the two charge the same for 4 GB and 6 GB plans. Financially, the slight discount lowers Verizon's ARPU for eligible subscribers by $5, though the analysts think the impact could be limited given Verizon's relatively slow sales of EIP.

Indeed, sales of Verizon's Edge program continue to trail those of AT&T by a wide margin. AT&T has said it expects around half of all its new customers in the third quarter to choose its Next handset financing plan. By contrast, only 18 percent of Verizon customers used Edge in the second quarter.

For more:
- see this Re/code article

Related Articles:
Verizon tweaks Edge program to increase time between handset upgrades
Sprint's new 'Loyalty Service Credit' will let subs lease an iPhone 6 for $5/month
AT&T: Next upgrade plans powered half of all smartphone sales in Q3
Analysts: T-Mobile likely to continue strong subscriber growth into Q4

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