It's common knowledge that Qualcomm (NASDAQ:QCOM) is at the center of the smartphone revolution. The company provides the critical technology at the heart of all modern phones (earning royalty revenue in the process), and it also makes crucial components like applications processors and cellular baseband modems, among others.
Meanwhile, Apple (NASDAQ:AAPL) and Samsung dominate the global smartphone market, particularly the high end. Those two companies combined grabbed 39.3% of unit market share in 2014, down modestly from the 46.1% share they scored in 2013. It should be no surprise, then, that Apple and Samsung are rather important to Qualcomm's top-line sales.
But you might be surprised with just how much Qualcomm relies on the Mac maker and South Korean conglomerate.
Reading between the lines
I happened to be perusing Qualcomm's 10-K the other day (it's what we Fools do in our spare time), and I stumbled upon this interesting nugget:
QCT and QTL segment revenues related to the products of Samsung Electronics and Hon Hai Precision Industry Co., Ltd/Foxconn, its affiliates and other suppliers to Apple comprised 49%, 43% and 38% of total consolidated revenues in fiscal 2014, 2013 and 2012, respectively.
That means effectively half of Qualcomm's business comes from Samsung, Apple, and their respective suppliers. Moreover, that reliance is increasing.
What happens if Qualcomm eventually loses one or both of these key customers?
This is precisely why it was such a major blow to Qualcomm when Samsung dropped the Snapdragon 810 in the Galaxy S6 earlier this year, instead opting to use its own Exynos processors. Shares dropped 1.2% when news broke in January that Samsung was making the switch.
This is how one of Samsung's three CEOs, J.K. Shin, explained the decision to The Korea Times, while affirming that the relationship between the two companies remains strong:
Samsung previously used more Qualcomm mobile processors. But we are flexible. If Qualcomm chips are good enough, then we will use them. Samsung always uses the best-quality components and materials to differentiate our products from those by rivals.
Qualcomm CEO Steve Mollenkopf still feels confident that he can win back Samsung the next time around, but losing the Galaxy S6 certainly hurt last quarter's results.
Apple has never used a Snapdragon processor in the iPhone, instead using its own A-chips. However, Qualcomm has been Apple's exclusive supplier of cellular baseband modems for several years, and Apple is the quintessential volume customer. Apple has shipped 210 million iPhones over the past four quarters, each sporting a Qualcomm modem.
There are signs that Apple is working on developing its own baseband modem. If true, it could still be years until Apple has a competitive solution ready for prime time. Strategically, it makes a lot of sense for Apple to design its own modem, but this is a tall order to fill when you consider how long Qualcomm has been at this game.
The possibility of one day losing the iPhone slot is a major risk factor that Qualcomm investors cannot ignore, even if it's not imminent.