Apple's new iPhone 6s. Image source: Apple.
So I was poking around in Qualcomm's (QCOM 1.51%) most recent 10-Q the other day (it's what we Fools do in our spare time), and I stumbled upon a small snippet that serves as additional evidence that Apple (AAPL 2.52%) truly is stealing market share from archfrenemy Samsung in the high-end smartphone market. This theme has been accepted as common knowledge over the past year among smartphone industry observers, but it never hurts to have more proof of the damage.
Without further ado, here is the relevant section found on page 25:
Our business has been affected by changing industry dynamics, including: an increased shift in share among our customers within the premium tier, which will continue to negatively impact sales of our integrated Snapdragon processors and skew our product mix toward lower-margin modem chipsets in this tier; an increased use of internally developed integrated circuit products by certain of our OEM (original equipment manufacturer) customers, which has led to a decline in share at a large customer; and the acceleration of intense competition in the low-tier, particularly in China. We anticipate that our results of operations, particularly for our semiconductor business, QCT, will continue to be adversely affected by these factors in the remainder of fiscal 2015, and continuing into next fiscal year.
Let's translate since Qualcomm must be coy and speak in vague terms due to the countless NDAs that it's undoubtedly subjected to.
Reading between the lines
Investors already know that Apple and Samsung are Qualcomm's largest customers, accounting for nearly half of total revenue last fiscal year (including both licensing and chip businesses). As such, Qualcomm has a unique view of the competitive dynamics between Apple and Samsung. It's filling their orders for different components, after all.
Samsung uses integrated Snapdragon processors in a wide range of its Galaxy phones, although not the latest flagship Galaxy devices, while Apple has long designed its own processors for use in combination with Qualcomm's best-in-breed cellular baseband modems.
The "skew" in Qualcomm's product mix shows that Apple is winning share, and as a result, Qualcomm is selling less Snapdragons and more modems, which are less profitable. Even within Samsung, the South Korean conglomerate continues to shift increasingly toward its in-house Exynos processors, including this year's Galaxy S6, Galaxy S6 Edge, and Galaxy S6 Edge+.
The disclosure is confirmation of how bad things have gotten at Samsung, even as it remains the top smartphone vendor in the world by unit volumes. Its mobile operating profits continue to shrink and it is preparing to lay off 10,000 employees to cut costs. Meanwhile, Apple's iPhone 6 and 6 Plus unit sales are skyrocketing, particularly in key markets that strongly prefer large phones like China. Just imagine what the freshly announced iPhone 6s and 6s Plus models will do to strengthen Apple's momentum.
Soon enough after the new iPhones ship, the teardowns will reveal whether or not Qualcomm was able to retain that comfortable (albeit lower-margin) cellular modem slot or if it lost out to Chipzilla. Chances are that Qualcomm was able to play defense, but eventually Apple will probably put the squeeze on it, much like it does with its other suppliers.
