Qualcomm's (NASDAQ:QCOM) chip business performed well last quarter; revenue grew modestly year-over-year as profitability surged. Unfortunately, that bit of good news was overshadowed by a disastrous result in the company's licensing business, due to legal disputes with Apple (NASDAQ:AAPL) and another undisclosed customer.
While the following piece of good news hardly makes up for the uncertainty around Qualcomm's licensing business, any bit of good news should be welcome to Qualcomm stockholders.
Per analyst Jun Zhang (via Barron's), Qualcomm's financial guidance for the current quarter implies something positive for the company's chip business.
No more modem share loss?
During the iPhone 7 generation, Qualcomm found itself in the position of having to split cellular modem orders with rival Intel (NASDAQ:INTC). The exact split between the two vendors isn't publicly known (DIGITIMES claims roughly 30%), but it's probably safe to assume that Qualcomm has the lion's share of the orders because its modem works on a broader range of carriers (particularly those that utilize CDMA/EV-DO).
There was some concern a while back that the legal spat that's ravaging Qualcomm's licensing business would lead Apple to increase Intel's modem allocation in the coming iPhone generation from a reported 30% to around 50%.
However, Zhang says that Qualcomm's guidance for the current quarter "indicates no share loss in Apple's iPhone 8, which is consistent with our recent thoughts."
This analysis is backed up by Raymond James analyst (also quoted in the Barron's article), who also thinks that "there is little change to Qualcomm's iPhone share for [iPhone] 7S builds, although that can change as time progresses."
The real risk comes next year
Although this news is a small positive for Qualcomm's chip business over the course of the coming iPhone cycle, it's worth noting that Intel's latest XMM 7480 modem -- the modem that'll almost certainly be used in some of this year's iPhone models -- doesn't fundamentally remove the barrier that effectively caps Intel's iPhone share: lack of CDMA/EV-DO support.
However, with Intel's upcoming XMM 7560 cellular modem -- which should support gigabit LTE and other goodies that Apple's iPhone will miss out on this year -- the company has said that it has added CDMA/EV-DO support.
In theory, then, Apple can choose freely between Intel modems and Qualcomm modems for its 2018 iPhone lineup. That's a clear risk for Qualcomm's stand-alone modem business and an opportunity for Intel's.
Fortunately for Qualcomm and its chip business, sales of cellular modems to Apple, while significant, aren't critical to the company. Apple could completely cut Qualcomm out of the modem loop in 2018 and beyond and while such a move would sting Qualcomm (and, frankly, be a bad idea for Apple considering that Qualcomm is a more reliable modem vendor than Intel is), it wouldn't be a death blow.
Qualcomm sells chips to many smartphone vendors, and virtually all its non-Apple customers buy full system-on-a-chip solutions (that is, integrated applications processor with cellular baseband), which means that Qualcomm likely sees higher revenue per unit from its non-Apple chip customers than it does from Apple.