In An Apparent Huge Win, Intel Said To Land An LTE Socket In The iPhone

Having been on a downhill journey so far this month, Intel’s (NASDAQ:INTC) stock price increased marginally in early trades yesterday. The reason for the rally was a recent report by VentureBeat stating that Intel’s recently launched XMM-7260 4G baseband modem will be used in the next generation iPhone aimed at emerging markets of Asia and Latin America. The site adds that Apple engineers have been making trips to Munich, Germany, to work with Intel engineers to ready the Intel LTE chip for the iPhone. ((Report: Intel partly replacing Qualcomm as iPhone modem supplier, Seeking Alpha, March 11, 2015)) Infineon, acquired by Intel in 2011, was once the iPhone’s (3G) baseband supplier, before Apple (NASDAQ:AAPL) switched to Qualcomm (NASDAQ:QCOM). Qualcomm currently accounts for the majority of the mobile chip market, and for years has been the key supplier of chips for iPhones.

Qualcomm’s lead in the latest LTE (long term evolution) standard helped the company win more than 80% share in chips for 4G phones last year. Intel accounted for less than 1% of that market, according to data from IDC. ^[1]

Apple sold 193 million iPhones last year, and will likely sell more than 200 million this year. As with most cellphone manufacturers, Qualcomm’s modem sales to Apple help enable the sale of several complementary parts, including an RF transceiver, a power management IC, a receive-only chip, and an envelope-tracking IC that lowers power draw. Loosing Apple as a client can be a serious blow to Qualcomm. ((Report: Intel partly replacing Qualcomm as iPhone modem supplier, Seeking Alpha, March 11, 2015)) For Intel, it would be a big win and can help trim the huge losses that the company’s mobile division has incurred in the last few years. Intel has been working hard to reduce its dependence on PCs and increase its presence in the mobile market, where demand is outpacing that for PCs.

Our current price of $34 for Intel is marginally higher than the the current market price.

See our complete analysis for Intel

Intel’s Expanding Presence In Mobile Can Spur Future Growth; Contra Revenue To Decline In The Future

Despite significant decline in revenue and heavy operating losses from the segment (the mobile business reported an operating loss of $4.2 billion in 2014), Intel’s mobile business is showing considerable momentum. Although Intel’s Mobile and Communications Group revenue declined drastically last year , the company in fact  gained market share in the segment.

In 2014, Intel set a target to ship processors for 40 million tablets for the year but ended up shipping processors for 46 million, becoming one of the industries largest merchant silicon providers in tablets. For much of last year, the ramp up in its tablet volumes was offset by an increase in contra revenue dollars — hence the decline in revenues. With contra revenue, Intel has been paying tablet makers to cover the additional bill of materials (BOM) costs of switching from ARM-based processors. The goal was to establish Intel architecture in the marketplace and scale the supply chain for future growth.

For 2015, Intel’s key goal is to improve its profitability in the mobile segment as the company believes that it has done a good job establishing itself as one of the top producers of silicon in tablets. As Intel’s SoFIA SoC ramps, it will progressively reduce the building material cost that have adversely affected the company’s gross margins in the mobile business. Intel believes that it will no longer have to pay the subsidies for the SoFIA products. The bill of materials cost for a Broxton tablet is estimated to be $20 less than for Bay Trail, and SoFIA, with its greater integration and smaller die size, is expected to cost even less. ^[2] In sum, Intel is leveraging its advance along the technology road-map to lower the price and eliminate the subsidy.

Intel’s LTE technology, which was originally developed for phones, is becoming increasingly valuable in tablets and even PCs, as wireless wide area network connectivity becomes increasingly common. Intel estimates the rate of baseband attached to tablets will roughly double and that of PCs will rise to over 15% by 2018. ^[3] The company targets to drive $800 million out of its mobile business in 2015.

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1. Intel Says Its Has Chips Ready to Take Mobile-Phone Market Share, Bloomberg, March 2, 2015 [↩]
2. How Intel is buying, building a piece of the tablet market, PC World, January 18, 2014 [↩]
3. Intel’s (INTC) CEO Brian Krzanich on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, October 14, 2014 [↩]