Starting with the iPhone 7 series of smartphones, chip giant Intel (NASDAQ:INTC) has been supplying LTE modems to Apple (NASDAQ:AAPL) in support of its all-important iPhone product line. Being the sole supplier of modems for Apple's latest iPhone XS, XS Max, and XR smartphones led Intel's modem business to pop 131% last quarter

Now, according to a new report from Fast Company, Apple will source 5G modems exclusively from Intel for its 2020 iPhone lineup.

A person holding a chip that reads Intel 5G Modem.

Image source: Intel.

Let's take a closer look at the details in the report. 

Apple's using the XMM 8161

A while back, Intel announced that its first 5G modem is a part known as the XMM 8060. Fast Company says this part isn't what Apple will be shipping as part of its first 5G-capable iPhones. Instead, the report says "Apple plans to use Intel's 8161 5G modem chip for its 2020 phones." The XMM 8060, however, "will be used for prototyping and testing the 5G iPhone."

The baseband processor that's part of the XMM 8161 will reportedly be manufactured using Intel's upcoming 10 nanometer technology. On Intel's Oct. 25 earnings conference call, CFO and interim CEO Bob Swan said the yield rates of its 10nm technology "are improving" and that the company is "on track for 10nm-based systems on shelves during the holiday 2019 selling season." 

By contrast, the company's current X-GOLD 756 baseband processor that's part of the XMM 7560 that powers Apple's latest iPhones, as well as the successor, is manufactured using Intel's 14nm technology. The follow-on baseband that's part of Intel's upcoming XMM 7660 modem, known as X-GOLD 766, will be crafted using Intel's 14nm technology, too. 

At its technology and manufacturing day last year, Intel indicated that the performance per watt of its 10nm technologies was substantially greater than that of its 14nm technologies. 

Three panels comparing Intel's 10nm technology with 14nm technology in performance, power, and performance/watt.

Image source: Intel.

Apple reportedly "unhappy"

Fast Company claims that Apple "has been unhappy with Intel lately," probably "related to the challenge of solving heat dissipation issues caused by the 8060 modem chip." 

The report claims that while "Apple's current issues with Intel are not serious enough to cause Apple to reopen conversations with Qualcomm about supplying 5G modems," the iPhone maker "has held conversations with another chipmaker, MediaTek, about potentially supplying 5G modem chips."

Fast Company's source did reportedly say, though, that going with MediaTek would be a "distant 'Plan B'" and that "Apple and Intel have ample time to correct problems in the Intel modem platform." 

Implications for Intel

Back on the July 26 earnings call, Swan said the following with respect to the gross margin of its modem business: 

In terms of modem in particular, yes, we do expect to improve gross margins for our modem business, both with our 7560 product 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. So yes, we expect modem profitability to improve.

So if Intel wins all of Apple's 5G modem business, it seems likely that those products will be more profitable than the modems Intel is currently supplying to Apple. 

Intel still also has some room to grow its share of Apple's iPhone modem business. If we assume that Intel wins the entirety of the modem orders in next year's iPhones and then further assume that it will win all of the 2020 iPhone modem business, then when Apple introduces its 5G iPhones in the fall of 2020, it'll be using Intel modems exclusively in its iPhone lineup at the time. That share growth should help boost Intel's modem revenue from current levels.

On top of that, Apple would probably be using the XMM 7560 in its lowest-end product -- likely to be a discounted version of this year's iPhone XR -- along with the XMM 7660 in its mid-range product, and then the 5G-capable XMM 8161 in the flagship models.

Since Swan indicated that the XMM 7560 carries a fatter gross margin than the other modems it's selling to Apple, the overall gross margin of Intel's modem business could grow quite nicely over the next several years. 

Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool 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.