In the second half of 2016, Apple (AAPL 1.37%) launched the iPhone 7 and iPhone 7 Plus. One winner from those devices was chip giant Intel (INTC -6.41%), which managed to secure the cellular modem spot in some variants of the devices, sharing the socket with wireless chip leader Qualcomm (QCOM -0.42%). That win put Intel's long-suffering cellular modem business on the map after years of losses and little traction in the marketplace.
Intel also won some of the cellular modem orders for the currently available iPhone 8, iPhone 8 Plus, and iPhone X smartphones. Since Apple continued selling the iPhone 7-series models at a discount following the launch of the iPhone 8-series and iPhone X devices, Intel's total modem share at Apple likely grew over the course of Apple's current product cycle.
Now, according to comments made by Qualcomm on its July 25 earnings conference call, Intel has won the entirety of the modem orders for Apple's upcoming trio of iPhones. That's a significant win for Intel and a setback for Qualcomm. Let's take a closer look at what this could mean for both companies.
Intel's modem business set to grow
A little while ago, I estimated Intel's annual cellular modem sales to Apple at about $1 billion. Intel should get a sizable boost during the coming iPhone product cycle, as it'll be in all of the company's latest (and, usually, best-selling) models -- not just some. Apple will likely continue to sell the iPhone 7-series and iPhone 8-series devices as lower-cost options during the coming product cycle, but eventually those devices will get pushed out as newer models waterfall down Apple's product stack.
Over time, assuming Qualcomm doesn't win modem spots in future iPhones and assuming that Apple doesn't add another vendor to the mix (or build its own modem solution), Intel could eventually find itself with 100% iPhone modem share.
Additionally, it seems reasonable to expect that future cellular-enabled Apple iPad tablets will come with Intel modems, which would provide an additional (albeit relatively modest) boost to Intel's cellular modem business with Apple.
If Intel manages to get to 100% cellular modem share within Apple's products, then I could see Intel's cellular modem business (which generates the vast majority of its revenue from sales to Apple) eventually generating north of $2 billion in sales per year.
Intel winning the entirety of Apple's iPhone modem business isn't likely to be a game changer for the chip giant, which analysts expect to generate more than $68 billion in revenue this year, but more revenue and profits is generally a good thing.
Bad, but not devastating, for Qualcomm
Last quarter, Qualcomm reported that its chip business, formally called Qualcomm CDMA Technologies (QCT), saw revenues grow by about 1% year over year. This, management said during the accompanying conference call, was due to "strong demand from Chinese OEMs, offset by lower demand from Apple."
For the current quarter, Qualcomm expects shipments of its so-called MSM chips (these include integrated applications processor and modem products as well as stand-alone cellular modems) to rise 8% quarter over quarter "on seasonality and strength of our roadmap with Chinese OEMs" to around 215 million units (Qualcomm's official guidance is 205 million to 225 million MSM shipments; 215 million units is the midpoint). Qualcomm's also expecting operating margin for the business to be between 16% and 18%, up from 15% last quarter.
During the fourth quarter of Qualcomm's last fiscal year, the company shipped 220 million MSM chips. The midpoint of Qualcomm's guidance range suggests a roughly 2.3% year-over-year decline in MSM shipments.
While the loss of Apple's business is clearly a negative for Qualcomm's chip business (loss of profitable revenue generally is), it's by no means game over for the company's chip business, as its MSM shipment guidance for the current quarter shows. Indeed, remember that while Apple does sell more than 200 million iPhones each year, the smartphone industry shipped more than 1.5 billion devices in 2017 according to Gartner. Qualcomm supplies integrated applications processors and modems into many of those devices.
Qualcomm is also working to grow the amount of dollar content that it sells into these devices by offering other platform technologies like fingerprint scanners, 3D sensing modules, RF front-end components, and more, which could serve to further boost QCT revenue.
With that being said, Qualcomm doesn't seem to have completely given up on potentially supplying modem chips to Apple again, with Qualcomm chip business chief Cristiano Amon saying that "if the opportunity presents itself, I think we will be a supplier of Apple."