For years, Apple (NASDAQ:AAPL) had relied exclusively on cellular modems from Qualcomm (NASDAQ:QCOM) to power its iPhone line of products. However, beginning with the iPhone 7, Apple chose to dual-source the modem from both Qualcomm and chipmaker Intel (NASDAQ:INTC).
Intel appears to have gotten a significant amount of iPhone share, but that share is necessarily capped because Intel's modems don't support the CDMA standard, while Qualcomm's do.
Intel's upcoming XMM 7560 cellular modem -- which should be ready in time for Apple's 2018 iPhone -- fixes this deficiency by adding support for CDMA.
Given the legal battle between Qualcomm and Apple, there has been some concern and/or speculation that Apple might ultimately drop Qualcomm modems altogether in favor of Intel ones.
Per comments Qualcomm made on its most recent earnings call, though, it seems that Qualcomm management isn't expecting Apple to sole-source from Intel in the foreseeable future.
Qualcomm staying in the Apple supply chain
In prepared remarks made by Qualcomm CEO Steve Mollenkopf on the company's April 19 earnings call, the executive said the company "will continue to focus on developing and delivering the best products to [its] customers, including Apple, consistent with [Qualcomm's] track record to date."
Mollenkopf further said that, "considering the strength of both [Qualcomm's] product roadmap and [research and development] investments, [Qualcomm] expect[s] to continue to be an important supplier to Apple now and into the future."
Business and investment implications
The way I view this is a "lack of significantly more downside" rather than, say, significant potential upside.
It's better for Qualcomm to be in the Apple loop than to be completely cut out; this is a reasonably sized revenue stream that clearly contributes positively to gross profit and, ultimately, net income. So, if Qualcomm can defend what share it has at Apple, that'd obviously be good.
At the same time, it's hard to get too excited for Qualcomm. Unless Intel really drops the ball in terms of future modem technology development (this becomes decreasingly likely as time passes, as Intel gains experience), I find it unlikely that Apple will want to go back to sole-sourcing cellular modems from Qualcomm -- especially in light of the allegations it has put forth against Qualcomm.
So, while Qualcomm's statements seem to suggest that its iPhone cellular modem percent share has a non-zero floor, I don’t see much potential share upside, either.
It's not a surprise that Qualcomm intends to continue to do business with Apple. After all, Apple has been in fiercer litigation before against a supplier (Samsung (NASDAQOTH: SSNLF)), and even as those two companies fought legal battles, Apple kept buying parts from Samsung.
What I think will be interesting to see is what kind of modem share Qualcomm captures in Apple's upcoming iPhone models. Intel's upcoming XMM 7480 modem still won't support CDMA, so on networks that require CDMA, Qualcomm modems will be the only choice.
The reason I'm interested in potential share shifts in this cycle is because I want to see if my hypothesis that Apple is using Qualcomm where it needs to while using Intel everywhere else holds up. If that hypothesis is correct, then we shouldn't see much of a shift during this product cycle, because Qualcomm already lost the share it was going to with the last product cycle.
If Qualcomm loses significant additional share at Apple this cycle, then we'll know that my hypothesis was incorrect.