Several months ago, Qualcomm (NASDAQ:QCOM), a longtime supplier of cellular modem chips for Apple's (NASDAQ:AAPL) iPhone product line, admitted to investors that Apple wouldn't be using its modems in its new iPhones and would instead purchase modems from a competitor. That competitor was widely understood to be chip giant Intel (NASDAQ:INTC).
Apple had already used Intel modems for some of its iPhone 7-series, 8-series, and X devices, but it formerly sourced modems from both Qualcomm and Intel. By clinching the entirety of the modem orders in this year's iPhones, Intel's modem business stood to win big. And, as we saw in Intel's third-quarter earnings release, win big it did.
More than doubling year over year
In its third-quarter earnings presentation, Intel observed that its cellular modem sales grew by 131% year over year.
The company doesn't explicitly break out its cellular modem revenue, but it's important to know that cellular modem revenue is included in the "adjacency" portion of the company's client computing group (CCG) results. That revenue was up 66.3% year over year, hitting $1.21 billion in the quarter. In its 10-Q filing, the company said the year-over-year growth in CCG adjacency revenue in the third quarter came "primarily from modem products."
If we suppose, then, that the entirety of the year-over-year adjacency growth derived from modems (this is probably an aggressive assumption, though, as the company appears to be gaining share in the market for PC Wi-Fi chips), then Intel's total quarterly cellular modem revenue looks like it was in the ballpark of $852 million.
Investors should keep in mind that Apple iPhone shipments tend to peak during its first fiscal quarter (specifically, in December) and fall off in subsequent quarters before demand surges again when new iPhone models are launched. In light of this, don't expect Intel's modem revenue to stay this high over the next several quarters. However, it's a good bet that the company's modem shipments will continue to exhibit strong year-over-year growth over the course of the current iPhone product cycle.
Indeed, during Intel's third-quarter earnings call, interim CEO and CFO Bob Swan said that in 2019, the company expects to "continue to grow memory and modem," and that those segments will be "accretive to earnings but a little dilutive to gross margin." Intel's gross margin on cellular modems is lower than the margins it generates from its PC and data-center processors.
The next product cycle won't show such huge growth
Intel is clearly benefiting from the significant increase in modem share in this year's iPhones. There's still room for the company to pick up some additional iPhone share over time as Apple discontinues older models like the iPhone 7 and iPhone 8 product families and replaces them with products powered solely by Intel processors. But the large step-function increase in Intel's iPhone modem share will happen over the course of this iPhone product cycle.
The company also seems to be looking to boost profitability of its modem revenue over time. If we rewind back to the company's second-quarter earnings call, Swan said the following in response to an analyst's question:
... [We expect] to improve gross margins for our modem business, both with our 7560 product [author's note: this is the product that powers Apple's latest iPhones] that will begin to ship in the second half, but also, as we migrate to a 5G world, we expect margins in the modem business to continue to improve.
After all these years, Intel has finally found real financial success in the smartphone chip business.