One of Apple's (AAPL 1.91%) top chip suppliers, Broadcom (AVGO 0.20%), announced its most recent quarterly results on March 15. Broadcom reported that its wireless-chip business, which generates a significant portion of its revenue from sales of chips to Apple, grew substantially last quarter, with revenue surging 88% year over year. Wireless communications revenue made up about 41% of the firs-quarter total.
"First quarter 2018 wireless revenue growth was driven by the ramp of the next generation platform from a large North American smartphone customer," Broadcom CEO Hock Tan said on the company's most recent earnings conference call. That customer is believed to be Apple.
However, the company forecasts a significant quarter-over-quarter drop in wireless-chip sales in the current quarter.
Let's go over the details.
A big drop in iPhone shipments
Tan said that for the second quarter of fiscal year 2018 -- the quarter that ends in late April -- Broadcom expects "a much larger than typical seasonal decline in wireless revenue, as shipments to [Broadcom's] North American smartphone customer will trend down sharply from the exaggerated first quarter."
The "North American smartphone customer" is broadly understood to be Apple and Tan refers to the prior quarter's wireless results as "exaggerated" because the delayed introduction of the iPhone X pushed chip sales into that quarter, though in an ordinary year they would have been recognized in the previous quarter.
Broadcom says that this sequential drop in shipments to Apple, which indicates a substantial reduction in iPhone build activity, is being partially offset by the ramp-up of chip shipments to Samsung in support of the Galaxy S9-series smartphone launch.
If there were any doubts that Apple dramatically cut iPhone X production (and possibly production of the iPhone 8 and iPhone 8 Plus, which have the same Broadcom chip content as the iPhone X), then this commentary from Broadcom ought to put them to rest.
On the bright side, per-unit dollar content in Apple's current flagship iPhones has increased significantly from the previous-generation iPhone 7 series, so Broadcom expects its wireless revenue to grow by a double-digit percentage year over year in the current quarter.
Broadcom's iPhone future
During Broadcom's earnings conference call, Tan indicated that Broadcom's line of sight with respect to its position as an Apple chip supplier goes out at least three years (and "possibly five years").
Moreover, Tan said that he sees Broadcom's dollar content in the iPhone growing at a double-digit annual clip through that time, though that's a far cry from the large one-time jump for Broadcom in the transition to the current iPhone models. The consistent dollar-content increases should allow Broadcom to deliver solid wireless growth over that time, even if iPhone shipments remain roughly flat.
What could serve as a bonus for Broadcom's wireless business is that Apple's iPhone unit shipments stand to grow this year. Apple's new iPhone portfolio is shaping up to be much more compelling than the lineup it launched last year. The combination of content growth and unit shipment growth could allow for an acceleration in Broadcom's wireless-chip business during its fiscal year 2019.
Keep in mind, though, that content growth is a much more sustainable story than unit shipment growth.