Qualcomm loses Apple business faster than expected

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Qualcomm's contribution to the upcoming iPhone is significantly lower than recently anticipated. This time, the reason isn't solely Apple's switch to its own modems, but a factor affecting the entire industry. Ironically, on the very day Apple releases its quarterly results, the long-time supplier has provided a revealing preview.

Apple's gradual divestment from Qualcomm has been expected since the acquisition of Intel's modem business in 2019 – and became a reality with the introduction of its first in-house modem chips. Until now, a Qualcomm share of around 20 percent for the upcoming iPhone generation was considered a working hypothesis, consistent with indications of a regional distribution of modems in the iPhone 18 Pro. The company has now revised this figure. The quarterly report states that the share will be significantly lower – and the explanation is different than expected.

What Qualcomm specifically announced

According to the company, the decline in sales of Apple products accelerated starting in the fourth fiscal quarter. The company explicitly cites its own supply bottlenecks as the cause, which are pushing the modem share of the next iPhone launch below the previously assumed 20 percent. CEO Cristiano Amon succinctly summarized the situation to Reuters: It's simply a matter of supply availability.

When asked during the conference call, management clarified that Apple was not being deliberately kept in short supply. They were simply adjusting to the bottlenecks and an already lower agreed-upon delivery volume.

The figures for the past quarter show just how much pressure the smartphone business is already under: Sales of mobile phone chips fell by 20 percent to $5.1 billion. For the current quarter, the company is forecasting adjusted earnings of $2.05 to $2.25 per share, which is below analysts' expectations. The data center division is expected to offset the shortfall and generate $5 billion by fiscal year 2027, and $15 billion by 2029.

The bottleneck shifts the narrative

The explanation is interesting because it reverses the previous picture. The modem switch was considered a purely Apple decision: in-house technology instead of purchasing it from another supplier, control over the entire chipset. Now a second factor comes into play that Apple cannot control – a supplier who apparently can no longer fully meet the agreed-upon quantities.

The cause is well-known. The shortage of memory chips is currently impacting the entire smartphone market, and according to Amon, costs have risen not only there but along the entire supply chain. The industry is operating at full capacity. As a consequence, Qualcomm will raise prices for its chips across the board starting September 1st to stabilize margins – a move previously announced by TSMC.

For Apple, this bottleneck has two opposing effects. It accelerates the transition to its own modems because purchased modems are not available in the desired quantities. At the same time, the cost surge is affecting Apple in other areas as well – the price increases for Macs, iPads, and Vision Pro at the end of June were the visible consequence.

Why Apple continues to pay Qualcomm

One detail is regularly overlooked in the discussion about chip shares: The business relationship doesn't end with the last modem delivered. Qualcomm also receives patent licensing fees from Apple, and these payments are independent of chip sales.

The basis for this is the settlement reached by the two companies in 2019, which resolved their years-long legal dispute. The licensing agreement concluded at that time initially ran for six years; Apple subsequently exercised an option to extend it by two years. It is therefore valid until March 2027 – meaning Apple will continue to pay even if no Qualcomm chip is used in the iPhone anymore. What happens after that is uncertain and will likely determine the next round of negotiations between the two sides.

A preview of Apple's numbers

The timing makes this news interesting beyond just the supplier perspective. Apple will present its third-quarter results today after the US stock market closes; the conference call begins at 11 p.m. German time.

Qualcomm's reports of increased costs across the supply chain directly impact Apple – most notably its gross margin, which was recently projected to be between 47.5 and 48.5 percent. Whether memory prices have already left their mark and what the outlook for the Christmas quarter looks like will likely reveal more about the company's situation this evening than any single revenue figure.

For Qualcomm itself, the direction is already set. The company expects that in the coming fiscal year, the majority of its chip revenue will come from areas other than smartphones. As Amon put it, they have compensated for the loss of their largest customer with their data center business. (Image: Shutterstock / FOTOGRIN)