What Apple's iPhone Production Cuts Mean For Intel

Chip giant Intel (NASDAQ:INTC) has long been a supplier of microprocessors to Apple (NASDAQ:AAPL) in support of the latter's Mac family of personal computers. Then, in 2016, Intel was added as a second supplier of cellular modems into Apple's then-newest smartphones, the iPhone 7-series.

This article originally appeared in the Motley Fool.

For Apple's most recent trio of iPhones -- the XR, XS, and XS Max -- Intel became the sole supplier of cellular modem chips, as the company's latest XMM 7560 modem added support for key cellular standards that were missing from its prior-generation modems.

As a result, Intel reported that its cellular modem business saw revenue pop 131% year over year last quarter.

Now, with reports circulating of production cuts to Apple's latest iPhones, it might be worth taking a look at how such cuts could affect Intel's modem business.

iPhone XR down, iPhone 8 and iPhone 8 Plus up

According to a report from Nikkei Asian Review a while back, Apple apparently told its contract manufactures to "halt plans for additional production lines dedicated to the [iPhone XR] that hit shelves in late October" and also increased production of both the iPhone 8 and 8 Plus.

From a big-picture perspective, cutting iPhone XR production and boosting iPhone 8 and iPhone 8 Plus production should have two impacts on Intel's modem business.

The first is that such a shift would slow down Intel's modem share gains against Qualcomm (NASDAQ:QCOM) in the iPhone. While Intel is the exclusive modem supplier for the iPhone XR, it splits the iPhone 8 and 8 Plus modem orders with Qualcomm. In fact, on Qualcomm's most recent earnings call, CFO George Davis revealed that the company had "approximately 50% modem share" in Apple's previous-generation iPhones.

So to the extent that Apple is shipping more iPhone 8 and 8 Plus smartphones at the expense of the iPhone XR, Intel's share gain against Qualcomm in the iPhone in general is impeded.

The other impact to keep in mind is that the iPhone 8 and 8 Plus use Intel's older XMM 7480 LTE modem rather than the newer, better XMM 7560 that's in the iPhone XR. It's common practice in the chip industry for prices of older components to come down over time, so a shift in iPhone sales from the XR to even Intel-based iPhone 8 and 8 Plus devices should have a negative impact on Intel's modem average selling prices and, ultimately, revenue and profitability.

Not a huge deal, though

But even if Apple is scaling back production of its latest iPhones and may be shipping more of its older-generation models than it had originally thought, Intel's modem business is still set to enjoy solid growth this year, considering it has 100% share in all of the latest models and a good amount of share in Apple's older iPhones, too.

The reported production cuts to Apple's latest models and apparent production increase of the older models should lead to a reduced growth rate in Intel's modem business, but that growth rate is still set to be quite high.

On top of that, Fast Company reported a while ago that Intel will be the sole supplier of 5G modems in Apple's 2020 iPhone lineup. If we make the safe assumption that Intel will also be the sole supplier of LTE Advanced modems in the 2019 iPhone lineup, then Intel's modem share within Apple's iPhone lineup is set to continue to march higher over the next few years, helping boost Intel's modem revenue even if iPhone unit growth stays stagnant or even declines somewhat.

Ashraf Eassa owns shares of Qualcomm. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.