Analysts from CLSA Securities recently claimed that Intel (NASDAQ:INTC) may have won 30-40% of the orders for the modems going into Apple's (NASDAQ:AAPL) next generation iPhones. As I noted in my write-up on this news, there's plenty of reason to be skeptical of this, particularly as Qualcomm's (NASDAQ:QCOM) modem technology -- which Apple has traditionally used exclusively for its iPhones -- is miles ahead of what Intel currently offers.
Stacy Rasgon, an analyst with Bernstein Research, recently put out another reason to be skeptical of such a win: Qualcomm's optimism around the operating margin of its chip business. Indeed, he argues that if Qualcomm were expecting to lose a big chunk of share at Apple, it would have a materially negative impact on the wireless chip giant's chip business.
However, Qualcomm's chip business is large and there are a lot of moving parts. I believe that another place to try to look for clues is in Intel's guidance/commentary around its mobile division. After all, an iPhone baseband win is something that would move the needle much more for Intel's mobile group than for Qualcomm.
So, what has Intel said?
At its most recent investor meeting, Intel CFO Stacy Smith said that the company's mobile group should see a reduction in losses on the order of $800 million. Per the executive, approximately two thirds of this loss reduction (~$533 million) will come from "product margin improvements" with the remainder coming from "lower investment."
A good chunk of that margin improvement should come as Intel completes its transition away from tablet chips that required contra-revenue payments/subsidies and toward products that do not require them. In other words, the transition away from Bay Trail/Bay Trail-CR toward the company's SoFIA 3G and SoFIA LTE chips should help.
Interestingly, Intel saw its mobile-related operating losses widen from about $3.15 billion in 2013 to approximately $4.2 billion in 2014, suggesting that the "contra-revenue" impact (due to highly negative product margin) was on the order of $1 billion.
If Intel reduced its losses in 2015 in mobile by roughly $1 billion with two thirds of those losses reduced via operating expense cuts, then this means product margin-related improvements only came in at around $333 million. This would suggest that just the final elimination of the "contra-revenue" associated with tablet chip shipments would probably be enough for Intel to hit its mobile loss reduction guidance in 2016.
In other words, the loss reduction that Intel expects to see from product margin improvements in 2016 may not suggest the Apple modem win.
What impact would an Apple modem win have in 2016?
If we assume that Apple ships about 75 million iPhones during Intel's fourth quarter and about 65% are of the newer iPhone 7/7 Plus/Pro variety, then ~35% share (the rumor pegs it at between 30% and 40%) would imply about 17 million modem units shipped.
Assuming that Intel prices aggressively and targets just 30% gross profit margin in units that it sells for approximately $15, then this would imply a contribution of around $76.5 million in gross profit dollars for the current year.
Unfortunately, the potential contribution for the year from this win, should it happen, probably isn't large enough to move the needle enough so that investors could sniff it out from the guidance.
We'll just have to wait for additional confirmation from other analysts or, even better, actual device tear-downs to learn whether Intel has found its way into the iDevice maker's flagship device.