A number of months in the past, Qualcomm (NASDAQ:QCOM), a longtime provider of mobile modem chips for Apple‘s (NASDAQ:AAPL) iPhone product line, admitted to traders that Apple would not be utilizing its modems in its new iPhones and would as an alternative buy modems from a competitor. That competitor was extensively understood to be chip large Intel (NASDAQ:INTC).
Apple had already used Intel modems for a few of its iPhone 7-series, 8-series, and X gadgets, but it surely previously sourced modems from each Qualcomm and Intel. By clinching the whole lot of the modem orders on this yr’s iPhones, Intel’s modem enterprise stood to win huge. And, as we noticed in Intel’s third-quarter earnings launch, win huge it did.
Greater than doubling yr over yr
In its third-quarter earnings presentation, Intel noticed that its mobile modem gross sales grew by 131% yr over yr.
The corporate would not explicitly get away its mobile modem income, but it surely’s necessary to know that mobile modem income is included within the “adjacency” portion of the corporate’s consumer computing group (CCG) outcomes. That income was up 66.3% yr over yr, hitting $1.21 billion within the quarter. In its 10-Q submitting, the corporate mentioned the year-over-year progress in CCG adjacency income within the third quarter got here “primarily from modem merchandise.”
If we suppose, then, that the whole lot of the year-over-year adjacency progress derived from modems (that is in all probability an aggressive assumption, although, as the corporate seems to be gaining share available in the market for PC Wi-Fi chips), then Intel’s complete quarterly mobile modem income seems prefer it was within the ballpark of $852 million.
Traders ought to remember that Apple iPhone shipments are inclined to peak throughout its first fiscal quarter (particularly, in December) and fall off in subsequent quarters earlier than demand surges once more when new iPhone fashions are launched. In mild of this, do not count on Intel’s modem income to remain this excessive over the subsequent a number of quarters. Nevertheless, it is a good wager that the corporate’s modem shipments will proceed to exhibit robust year-over-year progress over the course of the present iPhone product cycle.
Certainly, throughout Intel’s third-quarter earnings name, interim CEO and CFO Bob Swan mentioned that in 2019, the corporate expects to “proceed to develop reminiscence and modem,” and that these segments shall be “accretive to earnings however a bit dilutive to gross margin.” Intel’s gross margin on mobile modems is decrease than the margins it generates from its PC and data-center processors.
The following product cycle will not present such big progress
Intel is clearly benefiting from the numerous enhance in modem share on this yr’s iPhones. There’s nonetheless room for the corporate to select up some further iPhone share over time as Apple discontinues older fashions just like the iPhone 7 and iPhone Eight product households and replaces them with merchandise powered solely by Intel processors. However the massive step-function enhance in Intel’s iPhone modem share will occur over the course of this iPhone product cycle.
The corporate additionally appears to be seeking to increase profitability of its modem income over time. If we rewind again to the corporate’s second-quarter earnings name, Swan mentioned the next in response to an analyst’s query:
… [We expect] to enhance gross margins for our modem enterprise, each with our 7560 product [author’s note: this is the product that powers Apple’s latest iPhones] that can start to ship within the second half, but additionally, as we migrate to a 5G world, we count on margins within the modem enterprise to proceed to enhance.
In any case these years, Intel has lastly discovered actual monetary success within the smartphone chip enterprise.
Ashraf Eassa owns shares of Qualcomm. The Motley Idiot owns shares of and recommends Apple. The Motley Idiot owns shares of Qualcomm and has the next choices: lengthy January 2020 $150 calls on Apple and brief January 2020 $155 calls on Apple. The Motley Idiot has a disclosure coverage.