Back in 2010, chip giant Intel (NASDAQ:INTC) announced that it had agreed to purchase Infineon's Wireless Solutions Business (known as WLS) for $1.4 billion. The purchase, Intel said at the time, "expands Intel's current Wi-Fi and 4G WiMAX offerings to include Infineon's 3G capabilities and supports Intel's plans to accelerate LTE." 

Intel didn't ship its first LTE modem, known as the XMM 7160, until the second half of 2013, and that product didn't exactly set the world ablaze.

A person holding an Intel 5G modem between their fingers.

Image source: Intel.

It wasn't until Intel launched its third-generation LTE modem, known as the XMM 7360, that the company's modem business caught a big break. Apple (NASDAQ:AAPL) chose to use the XMM 7360 in some of its iPhone 7-series products (Apple dual-sourced modems from both Intel and rival Qualcomm (NASDAQ:QCOM)). Intel followed that product up with the XMM 7480, which Apple yet again chose to use in some of its iPhone 8-series and iPhone X products.

Intel began shipping its fourth-generation LTE modem, known as the XMM 7560, during the second quarter of 2018. Based on comments from Qualcomm on its July 25 earnings call, it would appear that Apple will be using the XMM 7560 exclusively in its upcoming iPhones. 

The chip giant's cellular modem business, largely thanks to Apple choosing to use its modems, now seems to be on the right track. Here's what investors need to know about it.

1. Where does the revenue go?

Intel's cellular modem revenue is recorded as part of the company's client computing croup (CCG) business -- the company's largest business by revenue. The company splits its CCG revenue into two buckets: platform and adjacency. Platform products, Intel says, "incorporate various components and technologies, including a microprocessor and chipset, a stand-alone [system-on-a-chip], or a multi-chip package."

Adjacency revenue is made up of everything else, including cellular modems.

If you look at how Intel's adjacency revenue has trended since it began shipping cellular modems to Apple, it's clear that winning the iPhone has been a significant boon to that subsegment.

Intel's client computing group adjacent products revenue by quarter.

Image source: Author.

Of course, Intel's CCG adjacency business is made up of more than modems, but modems now clearly make up a large part of that revenue base (just look at the sharp jump that the business enjoyed in the third quarter of 2016). So, if you want to get a feel for how Intel's cellular modem business is doing, keep an eye on the adjacency portion of Intel's CCG revenue.

2. Margins today and in the future

During Intel's most recent earnings conference call, interim CEO Bob Swan, in explaining to analysts why Intel's gross margins were set to decline in the fourth quarter of the year, said the following: "As we go into -- as we enter the second half and the fourth quarter, we see modem accelerating. We have a great product that's getting good traction in the modem space, so that product is accelerating, and that obviously has margins a little lower..."

The idea here is that as shipments of Intel's modems become a larger part of the company's overall revenue (this shouldn't be a surprise, as going from having only part of Apple's modem business for this year's upcoming iPhones to all of it should drive a big increase in modem shipments and revenue), Intel's overall gross margin percentage will get dragged down. 

INTC Gross Profit Margin (Quarterly) Chart

INTC Gross Profit Margin (Quarterly) data by YCharts

This isn't necessarily a bad thing -- as long as Intel's gross margins on those modems are positive, then the the ramp-up of modem sales should contribute positively to the company's overall gross profit dollars, ultimately improving CCG's operating income.

With that being said, Swan explained that as the company's XMM 7560 product ramps into the market and as the industry transitions to 5G wireless, Intel "expects margins in the modem business to continue to improve."

"We don't see it at the 60-plus percent gross margin level, but we do expect it to be a contributor to earnings performance as we go forward," Swan said of the company's modem efforts.

3. Beyond Apple

Although Apple is easily Intel's biggest modem customer, the company has made moves to try to proliferate its modem technology beyond Apple and the iPhone. For example, back in February 2018, the company announced a "long-term strategic collaboration on 5G" with Unigroup Spreadtrum & RDA.

"The companies plan to develop a 5G smartphone platform for the China market that will feature an Intel 5G modem and will be targeted to coincide with 5G network deployments in 2019," the press release announcing this deal read. The companies also said that they plan "a series of product collaborations utilizing Intel XMM 8000 series modems in multiple product lines targeting diversified markets."

On the same day that it announced the collaboration with Unigroup Spreadtrum & RDA, Intel also said that it's working with Dell, HP, Lenovo and Microsoft "to bring 5G connectivity to Windows PCs with Intel XMM 8000 series commercial 5G modems." The company said that it "expects the first high-performing 5G-connected PCs to surface in the market in the second half of 2019."

Beyond smartphones and PCs, Intel's modem webpage also says that it targets "Internet of Things (IoT) devices" with its modem products.

Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Ashraf Eassa owns shares of Qualcomm. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.